Dental CPAs

January Newsletter

2012-01-18T12:24:00.002-05:00

We have posted our January Dental CPA newsletter.

Happy reading!

Dentist has Questions about Quarterly Taxes

2012-01-14T17:41:00.000-05:00

I'm a new graduate and this is my first time sendingin my quarterly taxes. I started working Sept 2011 and my IE income for 2011(Sept 2011-Dec 2011) is around $25K. How much percent of $25K should I send infor my Jan 2012 quarterly tax stub? 30%? 33%? I don't have a CPA yet and willprobably find one end of Jan 2012 but it would be too late to figure out whatto send in for the January deadline. Considering $25K is a low amount would 30%of $25K be okay? FYI I'll be filing a W2 for my other PT job.

Can you give a poor guy a clue? I don't want to underestimate and get finedeither.

Did you have a tax liability for 2010? If so, what was it and have you had ANYtaxes paid in 2011 through any other W-2 jobs? What are you other sources ofincome in 2011? What about deductions?

You will pay tax on your NET earnings and hopefully that's a lot lower thanyour gross earnings. Without knowing anything else, 33% should be more thanenough to keep you penalty free. There's just not enough info to help guide youany better.

The payment isn't due until January 15th so you still have plenty of time tochat with someone early in January to make sure you pay the right amount.

This first appeared on Dentaltown.

Compensation for Staff at Recently Purchased Dental Practice Questions

2012-01-09T16:13:00.000-05:00

First, let this post help those with staff compensationissues as well as those that are or will purchase a dental practice. So some ofthese comments are not about what should have been done, it'll be a teachingmoment for those that MIGHT be buying a practice in the future:

Hello, I just purchased a practice from a retiring dentist. Theemployees are hounding me to give them a handbook. I am trying to decide ontheir benefits. As of now I have two hygienists who make $36/hr and an officemanager that makes $28/hr.
What are the market rates for the area?

The previous owner also gave 20, yes 20 vacation days to the hygienists paidand he paid 100% of their health insurance.

OK. How long have they been employed to "earn" the vacation days?Did he give them to every new employee? Big difference. I would agree that the100% of health insurance is generous this day and age, depending on how theirhourly rates compare to the market.

... I plan to keep salaries where they are. However what should I doconcerning health insurance? I do not want to pay 100%.

You need to consider their entire compensation package as a whole though...

...How about if I would agree to pay max of $300 month to any full timeemployee that wishes to sign up and employee is responsible for the rest?

That's not a bad idea and one that is very typical today.

Also when dentist sold he paid all their accrued vacation. I think that nowthey should be in a 90 day trial period and paid vacation should start accruingover.

You could do that; however, in most cases the buyer will "assume"the vacation days policy for existing employees meaning, these employees willcontinue to get their 20 days per year, new employees will have to earn themand if these employees are truly "overpaid" in total compensation andbenefits you'll simply need to "freeze" their compensation.

Paying them 20 days vacation and hiring a temp would break me.

Why? Wasn't this factored into your due diligence analysis before settling?Didn't the "high" compensation impact the purchase price? I don't seewhy continuing for these employees would break you if you were careful to considerthem during the due diligence phase.

With respect to changing them now, again, you would have known this beforesettling on the practice and could have requested that the seller make somechanges BEFORE you took over or at least informed them that the very generousways of the past will need to change under new ownership since a new owner willalso have debt service.

Tim I have no idea what the going rate is for area or how to even go aboutgetting this information. As for due diligence, it's easy to be on the outsidelooking in telling others what they should have done. I can tell you it wasvery difficult going to this office and seeing the owner show up and becomeemotional each time I pulled a chart or asked a question. It was a verydifficult situation.

If you read my opening comments I did not want my post to be about what YOUcould have done, but what others should do going forward, that was the intent. Ithink I've also given you some advice on what you can do now and I know it’snot much, as they say, it is what it is and you'll learn from this as youprogress in your career.

Your post will certainly help others.

You’re right but I don’t know what could have been done different anyways. Itmay have caused me to start off with no employees on day 1.

Maybe,maybe not.

I just had a buyer that settled on a practice within the past two weeks. The employeeswere treated VERY well: hygienist was being paid 45% of their revenue,almost unheard of. The seller and employees BOTH knew he was being WAYgenerous.

The buyer asked seller to talk to the employees and he did and they understood.Tthe staff knew they couldn't get what they were getting anywhere else. Theseemployees knew their compensation was going to be reduced as soon as the buyertook over. What they also knew is that their revised compensation was stillvery fair for the area.

Again, not much you can do now unless the employees know they have it great, ifthey do, still others can learn from this.

This first appeared on Dentaltown.

New Year's Resolutions for Businesses

2012-01-04T15:28:00.000-05:00

Here is a guest blog from our friend Lisa Sparks of Bowie and Jensen law firm.

New Year'sResolutions for Businesses

Hereare 10 New Year's Resolutions that will get this year off to a great start:

1. Be clear and concise about company policies. Review your employeemanual and other policies for any necessary updates. If you don’t haveone to review and update, set a firm deadline for drafting one.

2. Green your business. Find sustainable practices and implement themto save money and improve social responsibility. Easy places to start arerecycling programs (paper, plastics/cans, and electronics), buying re-usable,recycled, and/or biodegradable kitchen supplies, turning lights off andunplugging unused devices, printing only when necessary, and sharing documentsand information electronically.

3. Stay on top of things. Verify (and calendar) renewal dates andneeded updates to your business filings. These include registrations inall of the states where you do business, intellectual property protections,professional licenses, etc…

4. Be in compliance. Check to make sure that your state and federallabor posters are current and properly placed at all covered worksites. Make sure that all employees are properly classified and update personnel filesand tax and benefit records as necessary (an employee’s classification maychange over time). Think also about whether any new or refreshertrainings are needed for safety, sexual harassment prevention, CPR/AEDprocedures, diversity, or conflict resolution.

5. Get paid. Make a plan to address and collect any unusually largeor aged accounts receivable that may still be lingering. Improve billing andcollection procedures if necessary.

6. Cut costs. Review your service contracts for upcoming renewals,needs changes, and untapped discounts. Negotiating rates isn’t just foryour cable bill at home. Memberships in professional and tradeorganizations often include group discounts.

7. Save everything that you need, but nothing that you don’t. Reviewyour email and document retention policies to ensure that you are adequatelyprotected in the event of dispute or litigation.

8. Be more prepared. Identify major problems or emergencies thathappened in 2011 and determine how to prevent or, if unavoidable, better planfor such occurrences that may happen this year.

9. Brainstorm new marketing strategies. Implement the best one on atrial basis and calendar a date to evaluate it. If it worked, make it apermanent part of your marketing plan. If it didn’t, move on to another idea.

10. Behealthier. Emphasize employee wellness to promote a healthy workenvironment and keep healthcare costs down. Hand out re-usable waterbottles (that’s green too), swap out candy for fresh fruit, organize alunch-time walking club, connect employees with information on local activitieslike yoga classes, or set up a corporate membership at a nearby gym. Weight loss, nutrition, and fitness challenges can help increase wellness andmorale with a little healthy competition.

To contact the incomparable Lisa Sparks, email her or call (410) 583-2400

Dentist has Questions about Qualified Retirement Plans

2012-01-03T11:45:00.000-05:00

I’d like recommendations for the best retirement planfor my office with my specific needs...

I currently have a 401k plan in place with Safe Harbor election. I feel like Ipay too much to administer it. I would like to finda retirement plan that is lower cost to me/the office.

Basically I am looking for a low cost (possibly free)qualified plan that my staff can defer money to, without me having to payadministrative costs and me having to match any percent of income. I amnot interested in being able to defer anything myself.

What about a SEP plan?

Here was your criteria from above:

1. I am not concerned about how much I can defer personally, assumeI don't have to defer anything myself.

2. I want the lowest cost (possibly free?) plan that can be run.

3. My staff does want to defer more than 5k (Simple IRA limit) per year

If I understand it correctly… if I contribute 1,2,3% (or whatever %) of mysalary, then I have to contribute to everyone the same %? What are yourthoughts and pros and cons of that?

Well, you asked us to assume that you didn't want to contribute. Otherwise, youare correct, that's how a SEP works. SEPs work well when the owner is the onlyparticipant or when the owner has been "employed" longer than theother employees (read a lot of turnover) and as a last minute thought.

Who will administer the simple IRA? Can I do it through Fidelity who wouldhouse the investments?

Sort of... you'll still be responsible to make sure everything’s beinghandled correctly.

The 3% contribution would apply to who?

Depends on the plan.

Would they have to qualify?

Generally yes.

Would it be every staff member?

It depends on theplan and the eligibility requirements.

Is that $ fixed or subject to change?

It depends on the plan,many allow for a change from time to time if not annually

I think you need to sit down with your CPA to narrow in on what you need basedupon your criteria and specific circumstances...

This first appeared on Dentaltown.

Dental Scratch Start-Up - One Corporate Entity or Two?

2011-12-27T16:02:00.000-05:00

I'm in the process of having another office. A scratch.

Should I open it under my current corporation, or should I start it under a differentcorporation.
Maybe in about 3 years, I'd like to sell my current corp. I don't know. But it’sjust more paper work to start a second corp. Is it worth the hassle?

Any thoughts on what is the right way to go? Pros and cons.

Thanks.

In my opinion, the key to the answer is in your question and that is if you're contemplating selling EITHER location soon and not theother, I would suggest you have a different entity. Why?

1. It helps keep things separate in order to betterevaluate the practice.

2. It should limit any potential liability to thatpractice that has the problem.

3. If you sell one and not the other, you don't haveto "open the books" of the one you're keeping.

Now, if you plan on having both locations for 10-15+years you could go with one entity initially and then separate them 3-5 yearsbefore you plan to sell one.

Believe me, this comes from experience. When thepotential buyer evaluates the practice, and it's combined with anotherpractice, you ask a lot more questions. As the seller, you have a lot moreexplaining to do and a lot more convincing to do that supply expense is reallyJUST for that office and not the other, that lab expense is JUST for thatoffice and not the other, etc.

The argument will be "well even with twoentities you can still have the one entity pay the other’s bills" and thisis true; however, at some point you have to give the benefit of the doubt untilproven otherwise in my opinion.

What kinds of savings would there be with only having one entity?

The savings of a second tax return,bookkeeping, accounting, other state filings maybe.

I heard that section 179 is scheduled to come back down to $25,000 peryear. That would be very bad to have two practices under the sameentity.

Why?

Can you elaborate on any thoughts you have.

Not much more than what I did above unless youhave any other specific questions.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

How Does PTO Impact Overtime Pay at a Dental Office?

2011-12-20T15:22:00.000-05:00

We are trying to figure out how to handle this weekas we are a startup practice. We are paying for holidays so our employeeswill get 8 hours of pay for today. Tomorrow the office is closed and theycan use paid time off (PTO). How do most people handle PTO if it wouldcause your employees to go into overtime for the week? Do you capthe number of hours the employee can elect to use so they can't go over 40?

You may not know this, OTis due on hours actually WORKED.

So in your example, let’s assume someone worked 25 hours Monday- Wednesday andyou give them 16 hours of benefit time for Thursday and Friday. That’s 41 hours;however, they only WORKED 25 hours and therefore, you would simply pay themstraight time for all 41 hours, OT of 1.5 x their hourly rate is NOT necessaryin this example.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Dental Associate has Practice Purchase Questions

2011-12-15T10:02:00.002-05:00

I'm going tobegin a 1-2 year associateship with the opportunity to buy 50% of the practiceafter that period. I've hired a practice sales broker/CPA to provide mewith a second opinion on the appraised value of the practice.

Jason Wood, Dental Attorney:

Is herepresenting you as a CPA or as a broker? There is a big differencein fees I would imagine.

I'm trying to arrangeit so everything about the associateship, transition, and purchase of thepractice will be arranged in a contract prior to beginning.

Jason Wood, Dental Attorney:

This isextremely expensive to do. My recommendation would not be to do this butto have everything addressed in the associate agreement with the particulars ofthe deal (ie purchase price, ability to acquire 50% of the building, etc.)being built into the contract. Otherwise to properly do this now willcost you around $15,000. Wait until you know you can work together beforespending this kind of money.

However, I'dlike to receive an appraisal of the building/real estate, but the CPA hasinformed me that it can become very expensive to have the building appraised. Although the CPA does not appraise office buildings himself he hasrecommended an agent he has used in the past. He has also told me thatthe building appraisal could cost several thousands of dollars and may not evenmatter since any bank/lender will want another appraisal to loan me themoney.

Jason Wood, Dental Attorney:

Agree that youcan buy in to the building at the appraised value of the building when youacquire the practice, that way you push the appraisal out and the bank thatwill lend you to money for the acquisition would be happy to lend you more onthe real estate since it strengthens their position.

Is there anybenefit to having the building appraised this early into theassociateship? With the real estate market as bad as it is I would liketo capitalize on the depressed market values.

Tim Lott, Dental CPA

You should keep in mindhaving it appraised now won't guarantee you that this value will be the pricein the future. Put yourself in the seller’s shoes. Historically, after realestate has declined substantially, would you be willing to lock in a price onan asset that's likely to go up in the future?

What you can do is consult with a commercial real estate agent and see what thecomps are for similar space so you can get a range of what to expect in termsof real estate value. See if that range matches what the seller is thinking. Idon't see any benefit in paying for the appraisal now.

With respect to the practice, I do see the benefit in trying to establish theprice now; however, just know that you can appraise the practice as of say12/31/2011 in 2013 very easily.

Good luck.

Jason Wood, Dental Attorney:

Sure. Creating the partnership agreement, the purchaseagreement, the lease review, etc. would be very expensive to do right now. You can:

1. Agree to the purchase price now
2. Agree to the closing date
3. Agree to when the parties need to back out before it becomes binding
4. Agree on stop gap measures to insure compliance after the back outdate
5. Agree on the structure of the partnership
6. Agree on the building acquisition

All in the associate agreement without having to draft all of the otherdocuments right now. That way if the deal doesn't go forward, you don'tspend the extra money on the details contained in all of those other documents.

Went ahead and attained an appraisal. I'm meeting with the salesbroker/CPA to discuss the appraisal. What are some questions to ask him?

Tim Lott, Dental CPA

It seems to me your questions will be driven by how that meeting goes and theinformation that gets presented. I don't know what questions I'm going to askof a seller\broker re: their valuation or asking price until I've seen whatthey've done, how they did it, the information they used generate theirreport.

Once you see this you'll be in a better position to know what questions to ask Iwould think.

Good luck!

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Bill and Hold or Placed in Service for Dental Equipment

2011-12-06T11:16:00.001-05:00

And I go to my equipmentsales rep for my tax advice too!

My startup office is under construction and won't be ready for moving in untilFeb, 2012. As usual, I have placed my equipment order while I did not pay yet.My equipment guy mentioned to me about the "bill and hold strategy"to take advantage of tax deduction. He said I can have tax deduction from my2011 income if I pay him this year as "bill and hold", andthen install the equipment in the new office in 2012.

Hint: ask the vendor about that section of the code that talks about"placed in service"!

My situation is that I established the entity as PLLC and solo proprietor this year, however, I am now working as an employee in other office, Basically,I have no income from my new office that is under construction.

First question: Do I need to file my 2011 tax return as a PLLC /soloproprietor? (like schedule C).

Probably and you mighthave some deductible expenses, it's also possible that won't have anydeductible expenses, just depends on the facts.

My second question: Is it a good idea to take advantage of taxdeduction with "bill and hold strategy"?

Of course you assume youcan deduct it, which you probably can't UNLESS you've placed it in service in2011 (see hint above).

If that's the case, then on schedule C, I don't have any income.

That's not a problem;many start-up businesses that open their doors for business at the end of theyear might not have income & plenty of expenses...

Can anyone shed some lights on this? Thank you very much!

Sure can, BRIGHT lightsTOO!

It might be a good idea to speak with your CPA foryear-end tax planning....NOT the equipment sales rep.

Thanks Tim! It's always great that you chime in to answer thosequestions. I talked to my accountant today as well. Basically, he has the sameopinion as you do that the equipment has to be in place and function.

You did mention that I may be able to deduct some expense this year.This is a little bit difference from my accountant. I would like to hearyour second opinion. I paid attorney fee, architect fee, part of theconstruction and equipment cost, and bought some computers and small equipmentwith my own assets so far. Can I deduct those expenses that incurred in 2010from my income as an employee if I'll file as a solo proprietor? Thank youvery much!
Many of those costs may not be deductible yet,however, they might be:

1. If a computer was placed in service this year to begin planning and trackingyour progress

2. Mileage to meet with advisors, planners, shop

3. Other minor expenses similar to those that you might incur this year aswell.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Is There a Tax Deduction for Buying Dental Practice?

2011-12-01T11:05:00.001-05:00

I am looking to purchase a practice and the building. Theappraisal on the building is pending, but assuming it seems fair, I willpurchase both. I have been approved for 100% financing for the practice10 yr. term, 5.95% through Wells-Fargo and am applying at another bank aswell to compare. The building numbers depend on the amount I putdown.

I have enough for over 25% down if I need it, but here is where I needhelp. I have already paid income tax on all the money in my savings that Iwould be using for the down payment, but the down payment for the buildingwould be a tax deductible expense. How can I work this where I canmake the down payment without using after tax dollars or can I pay myselfback the amount I put down for the building without having to pay tax on it(for example, if I put 50K down for the building with my after taxsavings, can I later pay myself back 50K from the practice withouthaving to pay tax on that 50K)?

Thanks for any help. It is greatly appreciated.

The down payment won't bea deduction; the cost of the building will lend itself to deductions for about39 years, excluding the land that isn't deductible and a few other costs withdifferent Tax lives.

Does that help?

It seems then tax-wise it would be smartest to put the least amount possibledown, since that is after tax money. However, a larger down payment willlower the interest rate by close to 1%. Tough decision.

Yep, tough decision andit's a cash flow/cash use decision as well...

The other thing to consider is how you allocate the price to each component,practice and real estate. Talk to your CPA about which might be morebeneficial, higher practice price or higher real estate price and talk to thelenders about how that might impact financing.

Sometimes you can get pretty creative when buying both together under the rightsituation.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Be Alert for Lease Agreement Taxes on Dental Equipment

2011-11-25T09:55:00.001-05:00

Don’t get double taxed on your business’s personal property. Recently, we have heard from some of our clients that they received bills from the lease finance company that included a personal property tax charge. If you have entered into a lease finance agreement and your state assesses the personal property (equipment and furniture) used in your business, you may be paying too much in personal property tax.

Many lease finance companies pass personal property tax bills on to customers that have entered into agreements with them. Although you must generally report details of leased property on your personal property tax return it should not be included in the schedule of personal property to be assessed by the state.

Always consult with your tax preparer for specific reporting requirements in your state. If you have paid tax on leased property on prior year returns you may be able to amend those returns and request a refund up to three years after the due date of the original return.

For more information, contact Lance Jacob of the Dental CPAs.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Are Quarterly Prepared Dental Financial Statements Worth the Cost?

2011-11-22T14:09:00.001-05:00

Myaccountant recommends doing quarterly financial statements. I agreed tothis for the first 2 quarters so far but what I have received from them is nottoo much different than what Quickbooks will generate for me. They docalculate the assets and liabilities which I can't do accurately with depreciation,but actually expenses/income report are not that much different than what I cangenerate with the push of a button.

They said it would make doing my tax return take more time (and moneyobviously) if I don't do quarterly financials.

So, should I keep paying about $500 a quarter to do financials or not?

1. Do you "need" the balance sheets everyquarter? When they're prepared how do you use them?
2. Can't you record the depreciation quarterly in QuickBooks? (The answer isyes.)
3. How much more would it cost to prep the tax return without the quarterlyfinancial statements? $2,000 more? Idoubt it

25 years ago before practices had access to software like QuickBooksand Quicken we were doing monthly or quarterly financial statements becausethis was the ONLY was the practices could see their Profit & Losses. Eventhen, what we learned was many wouldn't even read them. They would wait for ourmid-year and year-end meetings for us to review them with the client andexplain them.

Once practices had access to QuickBooks and the like, the "need" forus to prepare CPA financial statements decreased drastically and we were theones that went to the clients & said "Do you really want to pay us forthese when you can generate the same information yourself?" Many agreed andthat's why the majority of our clients don't want or need us to prepare CPA financialstatements. Just about the only time we do it now is when a bank requiresit.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

There Are a Lot of Things to Consider When Selling Your Dental Practice

2011-11-18T10:59:00.001-05:00

A Lot to Consider When Selling Your Practice

This is an article from our good friend, Thomas Snyder, DMD, MBA.

As our economy slowly recovers, we have seen an increasing number of doctors making the decision to sell their practice. Don't think this decision is like turning on a switch - there are many things you need to consider. Here are a few points.

1. Meet with your Financial Advisor
Can you really afford to sell your practice? You may be surprised. If you have never had a financial plan prepared, it's critical to take this step. We often speak to potential sellers who are emotionally ready to sell, but financially unable to do so. You may find that you'll have to put your plans "on hold" for a few more years, or conversely, feel quite confident that the practice sale proceeds will only enhance your retirement lifestyle.

2. Get a Comprehensive Practice Valuation
If you plan to use a broker, retain one who will prepare a "formal" valuation using multiple valuation methods. Most brokers charge a fee to prepare a formal valuation and some will credit the valuation fee against the future sales commission. Getting a "free" valuation usually does not serve your best interest. Just having a "number" appear on a spreadsheet with financial projections does not do you justice when potential purchasers are trying to determine if they want to make the commitment to purchase your practice.

3. Discuss the Tax Ramifications of a Sale with your Accountant
If you are a "C" Corporation, for example, there are some "road blocks" that must be overcome. How will you allocate goodwill between the corporation and yourself? How tax efficient will the future sale be? Getting answers from your accountant regarding what you'll retain after a sale is critical to your decision to sell. Remember too that the clock is ticking on the capital gains rate extension that is due to expire at the end of 2012.

4. Do Not Slow Down or Work Less Days
When you take this step, many doctors often stop accepting new patients as well. This may hurt your practice's value and make a potential purchaser less interested in buying a practice that can be in a decline.

5. If you have an Associate, Be Sure that they have an Employment Agreement
This should contain a restrictive covenant (if allowable) and non-solicitation clause as well as a clause that transfers the associate's covenant to the new purchaser. If you do not have an existing agreement, consult with your attorney, as you may ask the associate to sign an Employment Agreement with these stipulations included for additional compensation known as "consideration." This will protect your practice's value. Selling your practice without a covenant and transfer clause will be very detrimental.

6. Take an "Honest Look" at your Facility
You do not necessarily have to make any large capital expenditures, especially if you want to sell in less than a few years. However, you should consider cosmetic enhancements if needed, whether it's fresh paint on the walls, new carpet, tile, landscaping, etc. Get your practice to look more aesthetically appealing. First impressions are always critical to any purchaser.

7. Fee Increases
We suggest you obtain a fee analysis to determine where you stand within the fee percentile range in your area. If you are well below average and you still have a year or so to go before sale, do yourself a favor and increase your fees. Chances are that your patients will accept your fee increase, you will increase your income, and you may even increase the value of your practice.

8. Purge any Uncollectible Accounts Receivable
Make every effort to collect those accounts that are past due over 90 days. If you fail to do this, it will become a "sticking point" in your negotiations. Usually Accounts Receivable are collected on your behalf for the first ninety days at no charge to you.

9. Retain an Attorney who has Dental Experience
This decision alone can save you and the purchaser thousands of dollars. Ask your accountant or broker for referrals, as they often work with attorneys who have considerable dental experience.

10. Be Realistic in your Timing.
Sometimes we get calls from doctors who want to sell their practice in six months or less! This is almost an impossible task for any broker. We advise prospective sellers that you should allow a broker 9-12 months to sell your practice.

In the end, a good deal of planning is necessary for you to really get your practice ready to be put on the market. Careful planning will give you the highest return, and most importantly, peace of mind.

This article originally appeared on the Snyder Group website.

You may reach Dr. Snyder by following this link.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Creating a Management Company for Your Dental Practice Requires Careful Documentation of Fees

2011-11-07T11:50:00.000-05:00

Documentation is the key: Foranyone looking to create a management company for their dental practiceadministrative tasks – Please read:

Income Tax—Intercompany ManagementFees: The taxpayerowned a trucking business that was organized into five wholly owned corporations,including a single member LLC whose sole business was leasing trucks to theaffiliated entities. The LLC paid management fees of $9,000 per month to theother entities for consulting, accounting, sales management, and safety anddriver relations. The Tax Court ruled in favor of the IRS in denyingapproximately half of the management fees because the taxpayer did not show howthe fees were determined and whether they were at arm's length. The court wasalso not convinced that the fees incurred on behalf of LLC were ordinary andnecessary under IRC Sec. 162. DanielFuhrman, TC Memo 2011-236 (Tax Ct.).

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Suffering Has Never Been Made a Prerequisite to Deductibility.

2011-11-04T16:44:00.002-04:00

I came across this in oneof my readings. I really like the hi-lighted quote – future reliance on thatquote could be quite interesting...

Income Tax—Hobby Loss: Taxpayer is a Certified Gilder FlightInstructor who performed flight instruction for the Boeing Employees SoaringClub. On 8/1/03, he formed an LLC to provide private glider flight instructionand glider plane rides. The LLC conducted activities primarily on weekends fromMarch through November during times of good visibility. For promotion, taxpayermaintained a website, distributed flyers at airports and aviation-relatedbusinesses, and advertised in a flying publication. Nevertheless, the IRSaudited his 2005, 2006, and 2007 income tax returns and decided that the glideractivities were not conducted with the intent of making a profit under IRC Sec.183. The Tax Court disagreed after going through the (nonexclusive) list offactors in Reg. 1.183-2(b) for determining whether a person is engaged in anactivity for profit. In particular, the Tax Court noted that a business "will not beturned into a hobby merely because the owner finds it pleasurable; sufferinghas never been made a prerequisite to deductibility." William Weller, TC Memo 2011-224 (TaxCt.).

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Dental Equipment Depreciation Question

2011-10-28T10:36:00.000-04:00

Hi, I have few questions regarding taxes on a scratch startup practice. My accountant told me that anything removable like equipment/furniture/cabinets are tangible expense which you can deduct right away. However, construction expenses such as paint, ceiling, electricity, plumbing is considered lease hold improvement which will require 39.5 year amortization (Yikes!).

My question is:

1. For equipment installations (Chairs, Compressors, Vacuum) , can 'Installation labor fee' be deducted immediately? (I hope they are since this equipment is removable.)

Generally, the costs incurred to get the equipment in service, including labor, sales taxes and fees are treated as part of the asset cost and therefore deductible along with the cost of that asset depending on how you choose deduct whether it’s using Sec 179 or normal depreciation.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Should Dentist Lease or Buy Office?

2011-10-21T10:57:00.001-04:00

Right now we are leasing a 1600 square foot office for $5,000 a month (we need additional room for growth).

The opportunity has come up to purchase a 2800 square foot condo for 1.2 million.

Who/what type of person should I talk to about seeing how my monthly financials will run? I just want to make sure I can handle the increase in payments.

I remember from school, once you own the place, there are more ways to shelter money, so your actualized monthly expense is less than if I were to lease

The twist for you is your statement about wanting to expand. Is it a want or a need? If it's a need, how will it impact revenue? You need to run some projections on how 2,800 square feet will impact your practice, both in expected revenue increase and OH increase and compare that to renting 2,800 square feet.

That’s what I would do.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Different Type of Dental Start-up Arrangement

2011-10-19T10:46:00.000-04:00

Any ideas how to get financing for a practice I want to buy the patients from and then relocate them into another dentist's space where I will rent (share space)?

The office I want to move to is owned by a dentist and they work 2 1/2 days / week so the rest of the week it is empty - perfect, I thought, to move patients to. I have not worked at either location and the practice that is available for purchase cannot stay where it currently is.

Sure, let the seller finance! Offer them 25% of total revenue generated from that patient base over the first 24 months (winds up being 50% of 2 year average) and pay that amount out over 3-5 years.

Good luck!

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Dentist Wants to Add His Wife to Payroll for 401k Benefits

2011-10-13T13:42:00.000-04:00

I have a safe harbor 401K + profit sharing plan set up at my office.

I'm assuming that this is a no brainer. Should I put my wife on payroll and defer the $16,500 to her retirement plan? This is the 1st year that she hasn't worked for another company and had her own plan with matching from her previous employer. I have a 4% match for those who choose to participate. Then of course the profit sharing portion to add at the end of the year if cash is good.

And I'm also assuming that I still pay the payroll tax on this amount.

Treat her like you would any other employee. If audited you better be able to show "reasonable" wage for her work.

So what would a "reasonable" wage be for a bookkeeper? She's an accountant but not a CPA--she does everything except tax filing for the office (she does budget, monthly cash flow analysis, marketing ROI, etc). I would think 15-20K would be considered "reasonable" but that sounds very subjective.

To add to our concerns, here's a recent tax court case related to a self-employed medical reimbursement plan... this case hits the point as to how careful you really need to be when simply putting any family member on payroll:

Income Tax—Sole Proprietor's Medical Reimbursement Plan: A sole proprietorship can sponsor (and deduct payments to) a medical expense reimbursement plan that provides family coverage for its employees, including the proprietor's spouse. However, the Tax Court previously disallowed the deduction where the spouse had been doing the same work for several years without compensation, then was paid $100 a month plus medical benefits for her duties in a later year. The Tax Court reasoned that (1) her payment of medical expenses simply relieved her husband of his obligation under Kansas law to pay for her medical expenses, and (2) she obtained no economic benefit from checks written from the couple's joint checking account because she was an equal owner of the funds in the account. The 10th Circuit has now vacated this decision and remanded (returned) the case to the Tax Court to consider whether or not the spouse was a bona fide employee, starting with a consideration of the common law worker classification factors. Shellito v. Comm., 108 AFTR 2d 2011-XXXX (10th Cir.).

Thanks for the heads up and research Tim!

You're welcome

I think I'm fine in this regard b/c this is her 1st year that she's not being employed full time in the corporate world. She has made around 5-7K/yr on my payroll to date and that was working full time at an outside business. So now that she's working around 1000 hrs/year with me, I think I can justify a $20K salary.

You bring up some great information which says to me that I need to fully document everything in case of an audit. However, I don't require any time sheets or clocking in/out of any of my employees so I won't have that information if the IRS asks anyway. Problem there or not?

It shouldn't be a problem with the IRS since you don't require it for any employee. Trouble may arise if you ever have another employee clock in or out or somehow tracks their hours and you have NO support for a family employee.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Can Dental Associate CE Cost be Deducted from Salary?

2011-10-10T13:55:00.000-04:00

I would like to take an implant CE course that will cost ~$6500. I am an associate in an office that does not pay for my CE. I would like to have the practice pay for this course and take the cost out of my gross income. If I understand things correctly this will save them payroll taxes and I will pay for the course with pre tax dollars. The CPA (non-dental) for the office seems confused. Maybe I am not communicating the situation properly for them? Or am I looking at things wrong?

Yes, it's likely miscommunication that's causing confusion. The practice CPA may think you're asking the practice to LEND you the money and withhold it to pay it back.

I have no doubt the CE would be deductible to the practice, therefore, maybe you can simply ask it this way:

"In lieu of paying me my normal wage, will you pay for CE up to $6,500 for this course"....of course you'll have to work out the timing since I’m guessing just one of your pay checks may not be enough to cover the full $6,500.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

New Dental Office Expenses - Where is Break Even?

2011-10-04T10:43:00.000-04:00

Hi! I opened my office brand new build out since July 13th. I’m struggling with staff turnaround, training. My overhead is 35K for month. Can I get advice in regard to best marketing? How long does it take to pick up the practice? I am kind of nervous about the overhead and running out of working capital. Thank you.

• Rent $4000 (Comcast +AT&T + electric + garbage + security + nea attachment + equip maintenance + electronic)

• Claims $2000

• My loan $7000 (7 yr loan for 400k)

• Supplies $2000

• Lab fee $1000 to $1500

• I have 3 staff, one front 2 back, at 40 hours per week I am open Tuesday to Saturday with some evening hours so employees when hired they wanted make sure get 40 hours. ~ 200 hours per month at $43 total pay $8600

• Doctor pay 3000 per month

• Payroll +unemployment taxes $2500

• For quicken +accountant + license +all malpractice + disability insurance $1000

• Marketing 2000 (did back of the receipt for a grocery store + mail post card + creating web site

• Miscellaneous goodies +tooth brushes for patients + gift cards $200

First month I produced 7,000

2nd month 20,000

3rd month so far 10,000

I just want to at least break even. Am I doing OK? Is this normal?

Staff wages will eat you alive. With $2,500/month in payroll taxes that's almost $400k/year in wages. $36k appears to be you so that's maybe $360k for other staff ? That's fine if you're doing $120k/month in revenue.

You must be burning through your cash. the last start-up client I had that felt obligated to support his initial staff for 40 hours per week when the volume couldn't support it had to walk away from the practice, their loan and their house.

You must change that NOW.

Also, I hope you aren't an S-Corp with the loan in Corporation name.

1. You likely won't get the benefit of the tax losses unless you funded some portion of the start-up.

2. You're creating unnecessary payroll taxes on your own comp, which eats into precious cash flow.

Good luck!

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

What Arrangement Should this Dentist Use for his First Hires?

2011-09-27T10:55:00.000-04:00

Well, I did it..I started my 2 operatory "little-engine-that-could" practice! A little background - I work at a FQHC 2 days/per week which is located an hour from where I live and where my new practice is located. I'm at my new practice 3 days/week and have been doing so for a little over three months.

What's that mean? You pay her a percentage of the total practice collections? Is there a min or max? I might need you to put some definition on that arrangement if it's as loose as it sounds.

I started off with a good friend of mine as hygienist/assistant and have been paying her based on total collections.

So she's not an employee either? You're paying her as an IC? If so that's also very risky.

She doesn't really have a benefits package or vacation time, as she's hoping that when we go full-time (~2 years) she'll enjoy a nice %of the increased collections.

My wife was working as front desk/office manager, but really didn't like it too much. However, she's still going to come in briefly 1-2 days/week to take care of bills and payroll.

Is she getting paid? If not, does she have any earned income from anywhere? If not have you considered pros and cons of paying her something?

Anyway, I have a new girl who's very qualified and fits in well with our little posse. I've agreed to pay her $14.25/hr.

I have her job description and everything, but what do I do about vacation, sick-time, personal days, continuing education, etc...

How many hours per week, 24? More? Generally, benefits like vacation, sick, personal go with full time, though sometimes those that have worked full time and received benefits might get pro-rated benefits when they cut back a little. you'll also need to define "full" time at some point, is it 32, 36 or 40 hours? Consider CE your benefit, not hers. You should want to have your employees well trained. It's your investment, just monitor that amount of investment and make sure it's quality CE.

Our total production, on average, has been around $25k...this doesn't leave much wiggle-room. I really want to be a good employer and make her feel valued but honestly I don't know where to start.

A lot of making someone feel valued will come from your actions (how you treat people) and words, not necessarily benefits and comp.

Honestly, my hygienist is more like a partner in my practice. We're a great team and she's invested a lot into making this practice happen. For this reason I decided to pay her a portion of total collections, with no max. This way she can share in the profits of a successful practice (someday). She does not, however, legally own any shares of the company (we're an S-Corp).

I will be putting my wife on the payroll per advice from my CPA.

The new girl will be working 30 hours/week. Would she get any paid vacation, sick time etc... We have a unique little ecosystem at this practice, and she'd be one of four people running the show (myself included). I want to give her some perks without breaking the bank.

Ok. If you want to give her some benefits she'll have to earn them. Generally, after the 90 day probationary period she'll earn 1/2 day of benefit time off for every month worked so in her first year she'll earn 4.5 days. Give her the first 1/2 day after the 90 days to make it 5. The following year –give her 1 day per month up to a max of 10 days (two weeks). Make it personal time off (PTO) which covers vacation, sick, personal time. After 5 years maybe 1.5 days for each month worked up to 15 days. No carryover of days. Either use them or lose them or pay them out, most pay them out. Just remember, once you start this anyone working 30 hours will likely be entitled to the same benefit unless they have an employment agreement with different rules.

With only $25k in production/month I can afford to pay her $14.25/hr. My overhead for this practice is extremely low, giving me some leeway. Remember, I have a small 2 operatory practice (rent is $800) and only 1 other employee who I pay based on collections.

I'm paying her 8%, which is close to the benchmark percentage of hygiene overhead. What I'll likely do is as we grow is put a cap on her salary. Right now she's doing mostly assisting since we've just recently opened and haven't established a solid recall schedule.

Keep in mind, of the $50,000, generally only about $12,000 is hygiene production and if she's getting $4,000 she's right where she ought to be and that's about $3,000 of hygiene per week, or about 3 day. I know many hygienists who would take $1,000 on 3 days of work… it's as close as you can get the $40/hour that a lot of hygienists make in this area.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Not Enough Information to Provide Range of Value for Dental Practice

2011-09-19T16:53:00.000-04:00

I would appreciate it if you can help me with this.

I'm planning to place an offer on a practice, main highlights:

• Blue collar area, mainly seeing all kinds of insurance

• Overhead 60%

• Collection : 2010: 434k, 2009 :300k, 2008 :300k, main reason new owner came on board in 2010, 2011 year to 8/31 289k

• Net in 8 months 120k

• 3 employees 23/h, 23/h, 14/h

• Working 4.5 days/week
• Equipment in decent condition

What is the range for a reasonable offer?

Jason Wood:

Not enough information to help.

1. Need state-locality as this is a big driver of "value".

2. Is there Medicaid? Are you currently a provider?

Tim Lott:

As Jason said, not enough info:

Of the past 3 years revenue can you tell us what the production was? Can you break it down between dentistry and hygiene? How many hygiene hours per week? Why the substantial increase in 2010 other than the new doc? More days? More upper end procedures? You say 4.5 days per week, which would equate to 36 hours per week usually generates well above $400k. Does the seller own the real estate? Of the 3 employees you've listed hours for what are their positions?

Answer these questions and you should get better answers, just not enough info yet to offer a range without having it be more of a guess.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Delaying a Dental Practice Purchase Can Be a Big Mistake

2011-09-06T11:33:00.000-04:00

Below is an article from our friend Dr. Thomas Snyder, the Director of Practice Transitions for the Snyder Group.

Most recent grads have in excess of $200,000 in dental education debt. Many of them may feel that they have to work as an associate for many years before even considering purchasing a practice. We have found, however, that the cost of delay can be significant. Oftentimes, the sooner you buy a practice the better your long term financial outcome will be.

Let's look at a hypothetical situation of two classmates who bought a dental practice, but did so at different points in time after their graduation. We'll make the practice's financial picture identical so the comparison will be consistent.

Dr. A has decided to buy a dental practice three years after graduating from dental school. Let's assume that the practice Dr. A will purchase has revenue of $800,000 with a 60% overhead, so the practice's Net Profit is $320,000. Let's assume the practice sells for $504,000. Dr. A will also need $100,000 in working capital so he will require a practice acquisition loan of $604,000. Dr. A's loan terms are for ten years at 7% interest, with annual principal and interest payments of approximately $84,000. Let's also assume the practice will grow 5% a year and that overhead remains at 60% excluding any debt service. Dr. A's projected net income before taxes, but after debt service, will be $236,000 in the first year of ownership.

Dr. B does not feel as confident in purchasing a practice as soon as Dr. A did. Dr. B decides to work as an associate for three more years. Let's assume Dr. B earns an income of $120,000 a year over that three year period with 6% annual increments in associate compensation. Dr. B also decides to buy a practice grossing $800,000 with overhead of 60% and Net Profit of $320,000. We'll assume that the purchase price will be identical at $504,000 with the same working capital needs of $100,000.

However, let's also assume that interest rates will have increased to 9% (up 2% from three years ago) with the same loan term of ten years. The annual practice acquisition payments will now be $92,000. Dr. B's net income after loan payments, but before taxes, will be $228,000 in the first year of ownership. Next, if we were to compare the total income earned by Dr. A over a ten year period from the time he purchased his practice, and comparing that to Dr. B's earnings over the comparable period, the difference amounts to over $826,000! So, when considering a purchase opportunity from a timing perspective, it can make a significant financial difference.

Imagine if Dr. B would have purchased a practice at the same time as Dr. A. The additional $826,000 in income could have retired his dental school debt earlier, putting him in a much stronger financial position. The old adage "timing is everything" is quite applicable to purchasing a dental practice.

NET INCOME COMPARISON

Timeline             Dr. A (Owner Year 1)               Dr. B (Owner Year 4)

Year 1                   $236,000                              $120,000

Year 2                   $252,000                              $127,200

Year 3                   $268,800                              $134,832

Year 4                   $286,440                              $228,000

Year 5                   $304,962                              $248,800

Year 6                   $324,410                              $270,832

Year 7                   $344,831                              $278,440

Year 8                   $366,272                              $296,962

Year 9                   $388,786                              $316,410

Year 10                 $412,425                              $336,831

TOTAL                 $3,184,926                           $2,358,307

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Do you have a valuable art collection in your dental office?

2011-09-01T09:36:00.000-04:00

Here is another blog post from our friends at the Dental Office Designers.

Showcase and protect your art - whether the value is in memories or monetary.

• Use accent lighting so that viewers can appreciate the art's true beauty

• Professionally install security locks on the back of your artwork to prevent theft

• Use UV and non-reflective glass or plexi glass

• Consider insuring original pieces and limited edition prints; in most cases the cost is nominal

Enjoy your artwork and keep it safe by treating it with the care it deserves.

Dental Office Designers (http://www.dentalofficedesigners.com/) a division of PLDA Interiors, sends bi-monthly "e-bites" addressing these topics and more.To be added to our list, email Barbara Portnoy at bportnoy@pldainteriors.com

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Assessing the Dental Offer

2011-08-25T12:19:00.000-04:00

Our friend Carl Guthrie of ETS Dental has kindly allowed us to share these valuable tips for dental associates/specialists in assesing their offer. If you are looking for a dental practice to join, your first call or email should be to Carl.

You’ve had the interview and the practice makes an offer.

Now what do you do? Is it a good offer, great offer, or a time bomb ready to blow up in your face?

Maybe you are trying to choose between more than one offer. Perhaps you are trying to determine whether you should take the first job you’ve been offered. We are here to help. Even if your offer is not from one of our clients, we would be happy to give you an assessment of how it stacks up.

Before you accept an offer, you need to be able to answer the following questions:

Will you be paid a percentage of collections or production?

What is included in these numbers?

Would most of your patients be Fee-for-Service, PPO, Traditional Insurance, Medicaid, HMO?

Will you have a full schedule from day one or will there be a ramp-up period?

Is there a guarantee? (Hourly, Daily, Weekly, Monthly)

What is the restrictive covenant? What is a reasonable distance?

How much notice needs to be given if things don’t work out?

Is there a clear documented path to practice partnership or ownership?

What are the practices fees?

Is it better to get 25% of production, with a full schedule in a fee-for-service, high-end practice or 40% of collections in a discounted fee-schedule, insurance-driven practice?

Is it better to make less during the first year in a practice that you could own in two years or make more in a practice where you will always be an employee?

Would it be smarter to accept an offer near my friends and my Dental school making a salary of $8,000 a month or move 50 minutes away and make between $150,000 and $200,000 my first year?

These are difficult and often life-changing decisions. We will be happy to talk you through the pros and cons of an offer. We will give you a candid assessment and helpful feedback. If the offer is from one of our client practices, we will be happy to intercede with reasonable questions or suggestions about how to structure the contract in a fashion that would provide more of a win-win arrangement.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Interview Tips for Dental Associates and Specialists

2011-08-17T09:47:00.001-04:00

Our friend Carl Guthrie of ETS Dental has kindly allowed us to share these valuable interview tips for dental associates/specialists. If you are looking for a dental practice to join, your first call or email should be to Carl.

Be open to a variety of opportunities. Go to every interview you can. It never hurts to talk, and an opportunity may turn out to be more than you expected. You can learn from each interview even if it doesn’t lead to a position.

Be open to other locations. The Law of Supply and Demand applies to career and practice opportunities. Typically, the farther you get away from a Dental School, the better the opportunities. Many of the best opportunities are located in great communities just forty-five minutes to three hours away from major Dental School cities. Typically you can increase your earning potential from 10% to 100% by settling in a city or community that is underserved.

Get your references ready. They can be former employers, co-workers, or teachers. Contact them to let them know to expect some calls. Have all their contact information in one place.

Have your production numbers ready. If you do not have production numbers, then have something that will give the hiring doctor a good idea of your skill set, speed, and experience. If you are just getting out of dental school or a residency, your procedure log may be a good substitute.

Consider preparing a "Proof Book" containing:

A current CV/Resume
Case presentations
Before and After photos
Production numbers or equivalent
Accomplishments
Treatment plans
Letters of Recommendation
References
Blank paper for notes
Questions for the practice
Blank Thank you notes

You may never have to open it, but it demonstrates preparedness and professionalism; this will set you apart from other candidates the practice may be considering.

The Interview

Because you are looking for a long-term position, it is as important for you to interview the prospective employer as it is for them to interview you. It is good to have some questions prepared. This will show interest and give you information you need, as well as take some pressure off the interviewer.

Questions for your interviewer:

Note: Do not lead off with questions about compensation.

What are your treatment philosophies?
What would be expected of me as an employee; what role would I be expected to fill; would I be limited to certain types of cases, such as endo or pedo, etc.?
Tell me about your patient base: families, geriatric, pediatric, etc.
What demographic changes have occurred with your practice in the last ten years? What changes are on the horizon?
Do you actively market or depend on referrals?
What kind of equipment do you use?
What about your practice are you the most proud of?
Where do you see the practice in five or ten years?
What are your personal and professional goals?
What are your goals for the practice?
Are you referring a lot of certain type of case out of the practice?
What specific things are you looking for the new Associate to bring to the practice?

The telephone interview

Return your phone messages and e-mails promptly. It speaks to your motivation, interest, and courtesy. Don’t let returning phone calls or e-mails become an issue or an obstacle to getting an interview. Even if you don’t think you will be interested in an opportunity, return the call. On more than one occasion we have seen a candidate get a call from Practice B when he was already talking with Practice A. The candidate puts off returning the call to Practice B. Two or three weeks later, the opportunity with Practice A does not work out and now Practice B will not consider the candidate because no calls have been returned.

Your main goal in a telephone interview is to get a face-to-face interview.

Ask for the interview. Take the initiative to set a time. Say something like, "From what you have told me, I would be very interested in meeting with you and coming to see your practice. When would be good for you?"

Smile--even on the phone. You really can hear when someone is smiling.

The face-to-face interview

Treat the staff with courtesy and respect. A practice owner often feels like his or her staff is like family and will listen to their opinion, especially if it is negative. On more than one occasion, we have seen excellent candidates not offered an opportunity because they treated a staff member poorly.

Smile and show some enthusiasm. More candidates are hired because of their personality and positive attitude than because of specific clinical skills. One high-end cosmetic practice told us they had interviewed six different dentists. They hired the candidate who smiled and appeared to truly enjoy being a Dentist, passing on some more experienced candidates with less personality and enthusiasm.

Show sincere interest in the hiring Dentist’s situation. Understand that the Dentist needs to solve a problem. Maybe the practice just lost a key Associate or Partner. Maybe the practice is growing and cannot keep up with patient demand. Maybe the Dentist needs someone to take over the practice when he or she retires. You need to get a clear understanding of the Dentist’s true motivation for adding an Associate. Once you truly understand the needs of the hiring Dentist, you can mutually determine if you are the solution.

Ask for the job! If you are interested, let the owner know you are interested. At the close of the interview say something like, "I just wanted to let you know that I am very interested in this opportunity and I am ready to take the next step, whatever that is. How should I proceed from here?" This doesn’t mean that you will accept the job with no further discussion. It simply shows you would be sincerely interested in discussing contract terms or meeting with other partners, consultants or staff members as needed.

After the interview

Thank you notes. Always send a Thank You note after an interview. Buy Thank You notes prior to going to the interview. Make sure you get a business card from everyone you speak with so you can verify the spelling of their name, their title and the correct address. Immediately after the interview, drive to the local post office or collection box, write a brief Thank You and mail it immediately. Do not put it off. If your timing is right, the practice will get the Thank You note the next day. Even if you don’t want the job, it is professional and impressive to thank your interviewer for his/her time.

Call the practice in two or three days. If you don’t hear anything from the practice after a few days, call them and let them know you are still interested. You will never loose out on an opportunity because you acted too interested.

Working Interview.

Offer to do a one- or two-day working interview.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Should Dentist Upgrade Equipment Now, or Wait?

2011-08-08T11:13:00.000-04:00

I recently did some cosmetic upgrades to my office, but my adec unties and J-chairs are functional, but 20+ years old. I have an older CEREC red unit and am considering an upgrade to the blue. I don't want to get stuck with super high interest rates if the economy tanks, so am considering the upgrading things now.

Well based upon our most recent experience wouldn't you agree that when the economy "tanked" the rates went down? Maybe it depends on what you mean by "tank".

My dilemma is whether to wait until things become so worn out that I have to replace them, or do I finance the upgrades now and tack on to my current loan, which I will have paid off in 3 years.

How long will the "upgrades" last and what's the cost of an upgrade compared to replacing?

I'm in a 3-chair office now, but have the opportunity in the next year or so to move to a larger 4-chair office, so was planning on waiting on upgrades until I can make that move. I just don't want to get stuck with 10+% loans down the road.

I certainly don't see those rates in 1, 2 or 3 years.

I was curious to see how long you guys are financing practice/equipment loans. Is 10 years standard on a $500k note or do most go longer.

These are two different loans. 10 years is a reasonable term on a practice loan (to buy a practice) and generally gets paid off in 5-7 years anyway. 5 year terms should be fine for equipment loans.

One thing to consider, depending on the amount you're going to spend, is to refi the existing 3 yr loan and adding on the equipment costs and go with a 5 year loan. If you continue to do well and have sufficient cash flow you might still pay everything off in 3 years anyway.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

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2010 Dental Overhead Benchmark - Our Observations - What has Changed?

2011-08-01T10:33:00.003-04:00

We’ve started the process of compiling our dental practice benchmark statistics based upon 2010 data and the initial results compared to five years ago are a little surprising to us. Since 2005 the US economy has gone through a downturn, a recession by most standards, and we were curious to see how that may have impacted the benchmark statistics for dental practices. We know that over the past five years there’s even more technology that practitioners are buying and using (i.e. new dental equipment and computers.) We’ve summarized some of our preliminary findings and provided commentary as to why we believe these changes have occurred. You can take the dental overhead benchmark survey here.

1. Revenue:

So far the mix of dentistry to hygiene production has increased in favor of the doctor, which means 76% of production is dentistry while 24% is hygiene. Five years ago it was 75%-25%. The surprising statistic though is the adjustments or write-offs. Five years ago the “average” practice was writing off 13% of their gross production and it’s increased to 17%. The main reason for our surprise is that during these last five years we’ve seen an increase in practices attempting to reduce or eliminate their PPO participation. That said, certainly the recession may have “forced” some of those practices back into PPO participation and we’re also seeing practices providing more incentives or discounts for cash paying patients.

2. Labor:

This area provided another eye opener. As a percentage of gross production (same denominator we’ve always used in our surveys), total labor expense (wages, payroll taxes, benefits including their education and training) dropped from 26.7% down to 22.7%. Assistants, hygienists and front desk combined showed a decrease while administrative showed an increase, possibly due to the treatment plan coordinator position and other types of positions. Both payroll taxes and benefits have also shown decreases. Another reason is that with the additional “higher end” procedures like Invisalign, implants and full mouth cases, the dentistry production per hour may be higher with the same or lower labor rates. We also know many practices stopped raises at some point over the past three years if not for all three years because of the recessionary trend.

3. Facility Expenses:

Total facility expense actually increased from 4.8% to 6.4%. Rent jumped by nearly 1% and the other costs like repairs, security and utilities all increased as well. We can only surmise that many had their rent agreements already in place as of 2008 and 2009 when the recession hit and we know landlords had no obligation to re-negotiate leases therefore, rent increases continued while procedure fees and revenues either revenues either flattened or declined (revenues). Generally utility costs have been going up following a trend by utility providers to raise their rates.

4. Lab and Dental Supply expenses:

Both lab and dental supplies have dropped by nearly 1% to 5.4%. Five years ago lab was 6.3% and supplies were 6.1%. we suspect lab has decreased in part due to the use of Cerec type machines since we’ve heard time and time again that labs had been increasing their prices. Dental supplies are harder to explain so we won’t even try.

5. Other Costs:

In total they went from 12.7% five years ago to 8.8% for 2010, nearly a 4% point drop. While a few categories increased like collections expenses (CareCredit) and advertising and promotion (practices simply doing more advertising) most of the other categories have dropped. Some of the categories that dropped are insurance, office supplies and postage (more electronic mail), professional services (more owners doing their own bookkeeping and payroll processing), telephone (more cell phones, less answering services, better technology and more competition).

Overall, total overhead went from 55.6% five years ago to 48.8% in 2010 based on gross production. That’s a rather significant decrease that was unexpected.

As we mentioned above, the dentistry to hygiene production ratio increased from 3.2:1 to 3.3:1 and even the hygiene production to their wages increased from 2.6:1 to 3.2:1. Hygiene wages have either held flat or come down in most areas of the country due to the economy and the cost of their procedures have gone up over the last five years. Many practices have used consultants to increase their hygiene department production and to boost assisted hygiene.

While many practices have been hurting over the past couple of years, they have done an excellent job on controlling their overhead. These practices have added higher end procedures and increased profitability within their practices. That’s a great sign for the industry and one of the main reasons we’re seeing more activity from the larger dental corporations buying up practices.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

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11 Reasons Why a Dental CPA is Preferable to a General Accountant for a Dentist

2011-07-26T11:01:00.001-04:00

Here are 11 reasons why using a dental CPA is preferable to an accountant who isn't dental specific. We'd love to hear your suggestions for other reasons as well.

11. Your accountant doesn’t know the difference between a prophy and a root canal.

10. Your accountant doesn’t know how participation in insurance plans affects the percentage of adjustments to gross productions.

9. Your accountant doesn’t know what reasonable associate compensation models are.

8. Your accountant doesn’t know if your accounts receivable balance is ‘normal’.

7. Your accountant doesn’t know what your overhead percentages should be based on your specialty.

6. Your accountant doesn’t know how much your hygiene department productions should be relevant to their compensation.

5. Your accountant doesn’t know what portion of your practice should be dentist production versus hygiene production.

4. Your accountant doesn’t regularly present to dental association, study clubs and schools on such topics as, How to Buy a Dental Practice, Life after Graduation, Overhead Benchmarks, etc…

3. Your accountant has never heard of Dentaltown.

2. You don’t understand why vendors are saying that new Cerec is practically ‘free’ after ‘tax deductions’.

1. You are seeing twice as many patients as last year, but your cash flow is tight.

These are 11 reasons you should contact the Dental CPAs for a complimentary consultation about your practice performance.

Send any questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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New Dentist Has Questions about Section 179

2011-07-21T09:31:00.000-04:00

I am planning to start my first Dental Office this year. Everyone tells me it’s especially best to start this year, 2011, because of additional advantages due to the changes in the 179 Tax law.

I have tried reading up on it and honestly the verbiage is a little too confusing.

Can you "please " just break into simple words for simple folk like me.

I read somewhere that how much you can deduct also depends on how much you make this year.

So, if I open my Office in November / December and my income isn’t that great, is it still going to be beneficial?

Any help is appreciated.

It's painful to have a client come to us a year or two after they started to see that they took too much 179 in their initial years either wasting other deductions, or not being able to use them due to the entity they selected or wasting them at lower brackets like 10-15-25% when they would have been more valuable at 25-28-31-33+ in future years or ALL of the above.

If I start my practice in November / December, my income from the new practice is not going to be much.

Not only will your income not be much, you'll have the ability to absorb a bunch of losses IF it makes sense in your case.

If I am an independent contractor and have my checks towards the entity I create, can that be accounted towards my income for the year?

Yes it can; however, is that a wise decision? Probably not. You can achieve the same "tax" benefits with the proper structuring of your new entity.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Dental Practice Valuation Issues – What a Seller Can Do

2011-07-05T09:25:00.000-04:00

During my many buyer representation engagements I tend to see some common issues when it comes to practice valuations that sellers could have avoided to help maintain their practice values. Here are some of those areas.

1. Clean Record Keeping:

Remember, buyers and their advisors will be picking over your information, it’s like inviting someone into your home, and you want it to be clean. Your practice books and records should be the same way, clean, easy to read, and at your finger tips. For example, your Quickbooks file should match the tax return numbers and if not to the dollar, pretty darn close and easy to match up.

2. Complete and Accurate Practice Management (PM) Reporting:

Make sure your PM software is current and accurate. You should be recording production, adjustments and collections by provider. Clean up your accounts receivables WELL before you plan on selling.

3. Don’t Coast:

This is one of the worst things a seller can do prior to selling their practice. It decreases dentistry production and therefore, decreases practice revenue which buyers AND bankers do NOT like.

4. Don’t Reduce Your Hygiene Hours:

Let me correct myself, THIS is the worst thing you can do. Not only are you reducing your practice revenue, you’re potentially losing patients as well.

5. Update Office Appearance and Equipment:

Again, just like a house, an outdated décor with old equipment will generally create less excitement with a buyer and less excitement means a reduced offer. Create excitement with your buyers with current décor, updated equipment and a fresh appearance.

6. Overpaid Staff:

Be aware of your staff compensation and make an effort to make sure it stays within “market” for your area. There’s nothing wrong with showing appreciation to your staff with discretionary bonuses, fancy trips, paying for CE travel, etc., however, make sure they’re aware that these are not customary fringes so they don’t come to expect it from their new boss.

7. Inflated Overhead:

Well before you sell, I’m talking 2-3 years ahead of time, begin to evaluate your practice overhead expenses and make sure you’re ONLY spending on things you NEED. I’m not talking about skimping on updated equipment; I’m talking about wasting money on unnecessary supplies, small toys, unnecessary services, etc. Become a good CFO! Profits will drive value most of the time and wasted overhead eats into your profit and will usually drive down the value of the practice.

8. Office Policies and Systems:

Well before you sell, make sure you have excellent operating systems and policies. If you’re not collecting a patient’s portion of the fee at the time of visit, make that change now. If you don’t take credit cards, start taking them. If you’re not running daily, weekly and monthly management reports, start doing so.

9. Track Your Referrals:

At least one year prior to a sale, begin tracking the procedures you refer out every day and be prepared to provide your broker with some really good, accurate information for the prospective buyers.

10. Dont’t Change or Eliminate any PPOs Prior to a Sale:

This can backfire if you begin to see fewer patients even if the revenue stays about the same. In most cases when a practice decides to eliminate PPOs, there’s a transition period where you’ll have holes in the schedule. Those PPO patients that opt NOT to come back for their scheduled recare appointment or follow-up work will in turn cause revenues to be lower for a period of time.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

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Why is Dental Buyer Representation So Important?

2011-06-27T15:14:00.000-04:00

When it comes to engaging a CPA to assist you in buying a dental practice you should NOT be looking for just any CPA, you need to work with a Dental CPA that has years of experience with not only dental practices, but dental practice transitions as well.

Whether it’s the outright sale of 100% of a dental practice, a 50% buy-in to an existing dental practice or becoming the 5th partner of a multi-doctor, multi-specialty dental practice, an experienced Dental CPA will know how to guide you through the process. They will know (and have hopefully vetted) the other professionals that you need: the dental attorney, dental lender, dental practice management consultant and/or the dental space lease negotiator.

When it comes to the Dental CPA, here’s a list of some issues that will need to be addressed:

1. Is the asking price within a “reasonable” range? If not, where is it and why?

2. How should the transaction be structured? What’s best for the buyer and why?

3. How should the price be allocated among the various assets?

4. What are the tax implications to the buyer? To the Seller? In addition to income tax, there are also sales and property tax concerns.

5. What should be included in the letter of intent (LOI)?

6. What’s the timing of getting the other advisors involved?

7. How has the practice been performing? How do the key performance indicators compare to the industry benchmarks?

8. What are the specific issues with a specific practice? Are there weaknesses that require caution? Are there hidden strengths that call for a premium?

9. Should an entity be created for the transaction? If so, what type of entity and why?

10. How will the transaction impact my income tax return in that year?

11. Will it support the debt service? What are the current lending rates? How much working capital will be needed?

12. What do I need to be concerned with when doing an on-site visit and chart review?

13. When do I need a demographic analysis?

14. Should I buy the accounts receivables? If so, how are they valued?

15. Should the seller remain after the sale? If so, for how long? What should I pay them?

Each transaction is different so there will be other issues that arise and a Dental CPA with experience will know how to handle the unusual issues when they develop.

Many times when a buyer calls me they’ll ask if we can prepare a valuation and my response is “yes we can, however, most of the time it’s not necessary”. Sure, it’s great revenue for the professional who does valuations to earn $4,000-$8,000 for a formal valuation, however, in 99% of the situations I’ve been involved with it’s just not needed, its overkill. More times than not a valuation has already been done and therefore, all they really need is a second opinion. We’ll gather all the same information that was used to develop that valuation (if not more since part of our task is the financial due diligence of the practice and to provide feedback on the practice performance). In fact, assessing the price is sometimes secondary to the aspect of analyzing the practice performance and providing feedback to the potential buyer on the practice issues we’ve discovered while assessing the asking price.

Here’s the general description for the phases of most buyer representation engagements we participate in:

The 1st phase is where we assess the asking price and the performance of the practice. That is, does the asking price fall within a reasonable range of value in our opinion and how is the practice performing compared to industry norms? With any valuation the professional has to make certain assumptions and estimates to arrive at their value. We also want to make sure there weren’t any mistakes made in arriving at the value on the sellers’ behalf. This phase also enables us to dig into the performance of the practice to let the buyer know if anything jumps out at us like excess labor costs, low dentistry production, higher than usual expenses, etc... It’s a thorough analysis of the practice that allows us to provide the valuable feedback to the buyer about the performance of the practice (which is a completely different than the value) and many times much more important.

The 2nd phase gets into the structure of the transaction and allows us to continue our financial due diligence. We look at transaction structure, timing, price allocation, seller’s compensation if they stay, how to handle A/R, redos, etc... We may ask for additional information such as the space lease agreement, accounts receivable aging (if it wasn’t discussed in phase 1), associate legal agreements, details on certain expense items and explanations on other unusual issues we discover. This is the phase where the LOI is usually created and\or discussed, negotiated and signed before going to the attorneys for legal agreement drafting. We’re also available during this phase while the legal agreements are being drafted and negotiated by the attorneys in case other issues develop that require our input. We’ll also begin to discuss entity selection and how it might impact your income tax situation.

The 3rd and final phase really encompasses a couple of minor tasks, that is, choosing an entity and getting it created, apply for the entities ID#’s and preparing individual income tax projections. We don’t create the entity, we advise you to have the attorneys to that, however, in some situations, we will create the entity and bill you accordingly for it and suggest that you have an attorney review it after you settle.

Lastly, we can assist the buyer in the set up of their initial accounting software with a dental specific chart of accounts and the initial balance sheet based upon the settlement documents. This allows the buyer to get off the ground running so they can focus on the clinical side of the practice along with getting to know the staff, patients and any other nuances for the practice.

When you’re going to invest a half million dollars plus on a business it just makes sense to be prudent and hire appropriate professionals to ensure you go about the process in the right way and you don’t get burned and put your investment at any undue risk.

If you’re looking to purchase a practice or buy-in to a practice begin assembling your team today. Begin your research to find out which professionals are out there to assist buyers, know their names, call them and interview them, ask for references. If you know anyone who has recently purchased a practice talk to them and find out what their experience was like. Ask them how the process went. Ask them about their first year in the new practice, and ask them who they used and if they were happy with the results.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

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What are typical percentages for dental production and collections?

2011-06-14T22:10:00.000-04:00

I've been practicing for one year, what should I expect?

I've heard some are getting as high as 40% of prodcution and others as low as 25%.

I've been offered 30% production where I pay half the lab bill, x-rays and exams are not included as production. It seems fairly reasonable any thoughts?

The "typical" ranges I see are:

25-30% of PRODUCTION

30-40% of COLLECTIONS

Without or without lab fees? How do you see that getting handled?
that varies. if the owner wants the assoc to be responsible for lab fees or a portion thereof, then the %'s noted above will be at the higher end of the ranges. if the owner is NOT concerned about making the assoc responsible for lab fees, the %'s used are closer to the lower end of the ranges noted above.more & more i'm suggesting that owners keep it simple & pay 100% of the lab and simply offer a % of revenue to their assoc w/o a lab cost charge . the owner should monitor the associates lab use to make sure the usage is kept in line with their "standards" and if need be, add some language that enables the owner to adjust assoc comp in the future IF lab gets outside specified norms.for example, if the practice history shows that lab costs as a % of doctors prod runs 12%, the owner can "charge" the assoc for lab costs that exceed say 15% of their production. i think you need to allow some cushion. if this is written into the associates employment agreement than both are completely aware of the need to control the lab & more importantly, it keeps the math simple to avoid the math errors the result in the associates believing they were cheated.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Dental Practice Buyer Representation - Introduction Video

2011-06-14T19:56:00.001-04:00

We frequently receive phone calls from dentists seeking assistance in purchasing their dental practices. We have put together the follow series of videos to outline the process.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Should Dentist Buy This Dental Practice?

2011-06-13T12:30:00.001-04:00

My background: I have been out of school for two years and it has always been a dream of mine to own my own practice. I am married with two kids and for the past two years I have been working for a corporate chain. I have learned a ton and consider myself ready. Hope I am right.

The practice I am looking at buying:

Practice is in a blue collar town with a population of 25,000. The population make up looks good to me as well as the average income (15% at 2k, 15% at 25k, and 20% at 25-50k). There are 13 dentists in town, 3 of which work in the same building as the seller (more to come about this). The practice has been there for the past 40 years but the building practically looks new.

Practice overview:

2007: 500K with 46% OH

2008: 430k with 45% OH

2009: 530k with 50% OH

Have you verified OH? With seller owning a portion of the R/E, you have to wonder how they've factored in FM rent and other potential R/E pass-throughs that tenants might usually pay.

Asking price: 345K

Real estate: 158K

The practice has 3 ops for the doctor. It is all equipped with digital x ray and cam, NO2 in all ops, TV monitors for patients in all ops.

The seller has 2 ops for hygieine which he shares with one other doctor in the building.

Issue #1:Are you going to be happy with that sharing arrangement? The hours you get them? What if you need more time in the chairs, how is that handled?

The building is 5500 ft and shared by 4 dentists altogether. The building was appraised at 630k and the seller wants 158K for the 1/4 (his part of the building) of the total building.

Issue #2: If you buy the real estate you now have 3 partners. You don't know them and they don't know you. Is there a partnership agreement? If issues regarding the building come up you're the "new kid on the block" with 3 votes against you.

The only thing the seller shares is the waiting room and the laundry room with all doctors.

Issue #3: Again, you're sharing with people you don't even know. Are your decorating tastes the same as theirs? If you want to add things to the waiting room that they don't what happens?

The 2 hygienists and the two hygiene ops but shares with only one other doctor.

So you also share the hygienists? Issue #4 Sharing staff is always difficult, especially when you're the "new" boss.

The seller space comes to be about 1500 ft. All four practices are separate other than what I mentioned above. The seller has two DA’s and one receptionist/manager. The practice is mostly FFS and few PPO insurances. The doctor works 3 days per week. The seller refers out molar endo, implant restorations, perio (SRP), ortho. The RDH only do prophies (2 per hour) but they are booked solid for 2 months.

Ok, 30 minute prophys - is that you're style? What if you want to move to 50 minute prophys, will that be a difficult change for them? Is that going to be different then the other doctor they work for? On the upside it sounds like a busy practice with a nice stable hygiene base. Of the gross revenue, what's the breakdown between doctor and hygiene production?

I like the practice a lot in that I think there is a lot of potential. I plan on doing the perio and not referring them out. What worries me is the fact that I would share the two hygiene rooms and the two hygienists. What would happen down the road if I want to get rid of one etc?

It's good to "worry" about that now.

I would love to get your opinion on this. What would be the fair price for this practice? When do I start negotiating?

No way to even guess at a figure without so much more info and without doing the due diligence. I'm assuming the doctors also covered for one another while they vacationed and since they're in the same space ever consider what a patient might do if they don't want to see you? Maybe see the other doctors in the space? That's another issue you need to consider.

It’s a very complicated set of facts that you'll have to weigh for this practice. Good luck.

Thanks Tim appreciate your input. I know this is a unique and different kind of opportunity. I am still not 100% sold on it and that’s why I am here. I will find out about what kind of agreements there are between the 4 owners regarding real estate. I have brought up some issues to the seller you pointed out and I was assured that I will be the boss in my practice and whatever I choose to do is what will happen. The way they utilize the two hygienists is that for every 3 minutes of prophy the doctor pays $23 to the hygienist and I am told this $23 includes the prophy supplies and the hygienist wages. If I choose to do one hour prophies then I will have to allocate $46 to go towards hygiene wage and supplies. What I find very weird is that all 4 doctors refer SRP. There is no way in hell I would do that. I plan on utilizing the hygiene to do 2 quads of SRP per hour which means it would cost me $46.

As for the hygiene total production the two hygienists produced $80k which comes to be 15% of the total production.

Well that appears to be a problem. They’re booked out 2 months because they're being shared by another doctor so how much can you grow in patient count? Is there chair time to add hygiene hours? $80k in hygiene with 30 minute appointments seems very low and 15% of total production doesn't indicate a healthy practice profile either.

Just seems like too many downsides with not much in upside....

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com
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Should Dentist Reduce Hours to Save Taxes?

2011-06-03T09:23:00.001-04:00

Just looking for confirmation that I am thinking right here... I have a couple associates that work for me out of 2 offices, and I work 5 days a week. 2010 Tax bracket made over the 33% bracket and will likely increase this year. Associates make 30%. I am thinking cutting back a day and let an associate work it. This way I would be substituting an income tax payment over the 212k threshold at 33% for a before tax payment to the associate at 30%. This is assuming production stays the same. In other words, if production for that day/ month is $10,000, and all the overhead is covered, then this is straight profit over the threshold. I could pay the associate 3000 and take the day off, or work the day and pay Uncle Sam 33%, and still take home about the same disposable income. Am I right in this thinking? Anything else that I am not thinking about?

Let’s do the math on your example:

$10,000 x 33% in tax = $3,300 so you net $6,700 to spend after tax, or

$10,000 x 30% to assoc = $3,000, $7,000 x 33% = 2,310, so you net $4,690 to spend after tax.

So those 8 hours cost you $2,010. Does that work for you?

Trying to keep it simple, you could get into a lot of details...let’s just assume the 30% covers Compensation + Expenses of associate.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Is an S-Corp the Correct Structure for this Dentist?

2011-05-23T10:43:00.001-04:00

Hi, a newbie dentist here, I'm going to set up myself as an S-Corp (no LLC in California), my attorney wanted to know if I will be paying myself via W2. I guess I need to know this info to set up an EIN. Can you advise?

Thanks a ton!

Jason Wood (www.DentalAttorneys.com)

Before answering all of the other questions your post raises...

1. Why are you setting up an S-Corp? I.E. What is the purpose?

Right now I'm being paid on a combination of 1099s and W2s, I'm single, no children, so no real deductions. I'm setting up S-Corp so it would be a bit easier for me to run deductions and expenses.

Next questions:

1. How much are you making? If you aren't making enough, the deductions will not equal the yearly maintenance costs associated with the corporation.

2. What are your short/medium term goals as a dentist? If it is to own or do a start up in the next 2 years, then starting a corporation now is probably not in your best interest since you should abandon your "associate corporation" when you go to purchase/start up a new practice because you do not want a liability connection between your new practice and your old associate life.

Tim Lott (http://www.dentalcpas.com/)

While Jason is guiding you through all the proper questions I’ll comment on your specific questions for the benefit of others that might be considering an S-Corp:

“My attorney wanted to know if I will be paying myself via W2.”

How else does an employee of a corporation get paid for rendering services? The answer is YES, even if it's a nominal wage as the corporation will probably have employee business expenses so it's usually a good idea to show wages to acknowledge you ARE an employee.

I guess I need to know this info to set up an EIN. Can anyone advise?

S-Corp is going to have an EIN regardless of if it has employees or not.

Right now I'm being paid on a combination of 1099s and W2s. I'm single, no children, and so no real deductions. I'm setting up S-Corp so it would be a bit easier for me to run deductions and expenses.

Why will an S-Corp make it "easier" to run deductions? What deductions does an S-Corp allow that a Sole Proprietorship doesn't?

Thank you so much for the info offered, I looked at my situation a bit more and I think I'd like to get situated thus:

My primary income is coming from a practice where I'm a partner at. This practice is set up as a C-Corp. I'd like to be able to help my partner avoid paying the payroll taxes by having my compensation be a straight forward corp-to-corp expense. Would I then be able to take that lump compensation, then disperse to myself (the individual - my corporation has no other employees, no other shareholders) a W2?

This bit of advice:

However, I have also been advised to NOT give myself a W2 (so I don't have to pay the payroll taxes on that) but to simply disperse to myself as dividends and then pay the 1040 at the end of the year.

Should generate this response:

"but the answers I've received have been less than satisfactory"

Beyond that your posts are quite confusing to me....bottom line is:

If you create an S-Corp to contract with a practice to perform dentistry and if that S-Corp is relying on a dentist to perform the dentistry (After all, an S-Corp can't perform dentistry....its employees do) that employee would require a W-2 as an employee.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Small Business Medical Insurance Tax Credit - Is it Really Worth it for a Dentist?

2011-05-16T15:56:00.001-04:00

You get up to 35% credit on what you pay towards medical. The only crappy thing is that your staff has to average under $50K income... But I think this could work in some parts of the country. Disappointed that it doesn't take into consideration that some areas have a higher income level and associated higher costs. Out of 15, I only have a third making less than 50,000.

We’ve had very few clients get the credit....as we suspected. For those that have, it's been at most $1,000, usually less.

The "average wage" calculation usually kills the chances. It’s generally based on full time equivalent. what that means is you could have several part-time people making $20k each & one or two full time making near or way over $50k (hygiene for example). The problem is, a 20 hour per week person making $20k is equivalent to a full time person making $40k and when you factor in the full time people making $50k or $80k (full time hygiene) your "average wage" exceeds $50k.

It’s not good for us either because it adds extra work to every business tax return we do.....

This first appeared on DentalTown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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The Dental Independent Contractor Status Draws Scrutiny

2011-05-09T16:35:00.001-04:00

Independent contractors are valid in various industries given the proper circumstances, including dentistry. However, the government has and will continue to look for abuses of the classification where employers attempt to use the classification to avoid employment taxes.

People who wish to be considered independent contractors (IC) should arrange their circumstances so that their case as an IC is defensible. Some of these circumstances may include: being able to perform work duties freely in the facilities of the owner, getting paid by the project or service (not hourly), paying for their own materials or supplies, using their own equipment, providing service not otherwise offered by the business owner, hiring and paying their own staff and control the result of their product or service. If these circumstances are not in place with the owner of the business, the general IC may not be an IC at all, they may be an employee.

One of our client’s is a dental specialist. They don’t own their own practice, they work in offices of other practitioners. They bring their own staff, they control their work process and the outcomes, their services are billed separately, they decide the days they work and because they’re a specialist, the owner can’t supervise their work (tell them how to do it). They also operate from their own entity so the contract is between two entities, an individual is not involved, other than the person providing the service.

Businesses must weigh the degree of the behavioral and financial relationships with workers when classifying them. The consequences for the owner who misclassifies an employee as an independent contractor could be: A) they’re assessed the employer’s portion of the social security and Medicare tax, B) federal unemployment tax, and, if the owner cannot prove the independent contractor reported the income on their return, they may also assess the employee’s portion of social security and Medicare tax, plus penalties and interest. If the owner had any employee benefit plans that should have covered the IC (health and retirement plans), there could be negative consequences there as well.

If you are an independent contractor, you are self-employed. To find out what your tax obligations are, visit the Self-Employed Tax Center on the IRS website.

You are not an independent contractor if:

• You perform services that can be controlled by the owner (what will be done and how it will be done)

• You use the owner’s equipment and supplies
• You service the owner’s patients or clients and they tell you when to work. (This applies even if you are given freedom of action). What matters is that the owner has the right to control the details of how the services are performed.

For example, a general dentist is working for another general dentist as an associate. The associate uses the dental staff, the associate is being supervised by the owner, they are told the hours they are working, they use the owner’s equipment and supplies, and this is the only office they work for. This associate would likely be classified as an employee.

If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor.

This is a serious issue for owners who are either intentionally or unintentionally misrepresenting relationships with workers. In cases of abuses, the owner is the party that will likely take the beating.

I recall back in the late 80's when I consulted with a stock broker who worked for a small brokerage firm where all brokers who worked for the firm were being treated as independent contractors. The IRS audited the brokerage firm for several years for the very issue being discussed. The brokers had to submit returns to prove that they were reporting their income correctly and paying the self-employment tax while the brokerage firm got slammed for hundreds of thousands of back payroll taxes, penalties, and interest. Ultimately, the brokerage went belly up, many people became unemployed and many clients had to find new brokers or move their money to a new brokerage where their broker landed.

We've had similar stories on a much smaller scale where IRS reclassified independent contractors as employees and made the client pay back-payroll taxes, interest, and penalties. I have only heard of one case where the independent contractor themselves got audited and reclassified as an employee and they got hammered income-tax wise because schedule C expenses became miscellaneous itemized deductions subject to limits and their self-employed retirement plan deduction got thrown out.

The bottom line is in just about every IRS audit of a business, one issue the agent must take a look at is the employee vs. independent contractor issue to ensure employers aren't trying to evade employment taxes.

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Are CPA Fees Too High for Dental Accounting Services Rendered?

2011-04-28T16:10:00.001-04:00

I became an IC in June of 2010 and paid my current CPA about $700 to incorporate me.

What did that involve? I suspect it not only created your entity it covered applying for your fed and state ID numbers as well for corporation income and payroll taxes. If so I think that amount is fair.

I also agreed to allow him to run my payroll (it's just me) and set up my taxes and 401k. His firm does everything for me, all I've really had to do is follow their instructions and sign a few forms they prepared on my behalf. I received a bill for Aug 1st through January 31st for about $6k and the other day I received another bill for February and March of about $1500.

I don't have anything out of the ordinary that I believe would cause such large bills.

Except you just said they do "everything" for you...again, what does that mean? Get a list of services they provided.

That's pretty much it and most of my colleagues are paying around 2k a year for the same services.

Really? Most of your colleagues became IC's in June, created entities and have their CPA firm apply for ID numbers and run their payroll and set-up their 401k plans? Are you sure about that? Those are NOT typical annual services....some of them are and even then, services like payroll and 401k administration are done by other providers, NOT CPA firms.

Is there a way to approach this without offending him? I prepared to give him an ultimatum to reduce my fees for the remainder of the year to total around 2-3k AND I also want to negotiate my current bill of $1500.

Well I hope you aren't prepared to throw out the ultimatum right from the get go. That's NOT the best way to open up a discussion where you might want something. If I were you I’d go in prepared, that is, ask for an itemization of the bills - i.e. services provided and the cost of each service. Review that before the meeting and use the services\costs you have issues with and allow them to explain. If you need to keep your costs within a certain range that's fine. Ask them what services they can provide to keep the fees within your budget. You might find that having a payroll service maintain your payroll MIGHT be cheaper anyway.

Do I have a right to refuse to pay the bill or only pay a portion that I deem appropriate?

That's an odd question in my opinion. Does a patient of yours have the right to refuse a bill for services you rendered or only pay for the services THEY deemed appropriate? Think about that. Part of the lesson here is to ask about the fees of the specific services you want performed BEFORE they are performed, even if it's an hourly rate for a service they can't state a specific price for.

Good luck.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Was an S-Corp Election the Correct One for this Dental Start-Up?

2011-04-19T09:49:00.001-04:00

I live in Massachusetts, but I am using a New York CPA for my taxes. I was happy with what he did for my taxes so far, but ever since I began the process of my start-up, I have started to lose some confidence in him. Even though I told him that my start-up was projected to open in 2011, he told me to set up my subchapter S-Corp right away. I didn't know anything at that time, so I just agreed and paid him $750 to set up my corporation.

I did not tell my bosses about my corporation because I didn't want them knowing about my start-up yet. Therefore, my paychecks still went to me, and not my company. So my corporate tax return for 2010 reported a $2471 loss, and $24221 total assets, from various costs, such as lease negotiation fees, lawyer fees, demographics reports, architect fees, some equipment, supplies, etc. After all the paperwork, he charged me $650 for the preparation fee, and I still had to pay a $456 minimum Massachusetts tax. I think that this $1106 extra cost could have been avoided if I did not set up my S-Corp until 2011, and I should have been informed of these costs at the beginning.

Was setting up my S-Corp in 2010 the right thing to do, or did my CPA rip me off for $650, and caused me to have to pay an unnecessary $456 in taxes? Was there an advantage to reporting the "soft assets" in 2010, compared to 2011?

I personally think I got ripped off, and have started to look around for a potential new CPA. What are the main advantages to having an in-state CPA versus an out of state CPA? I’m trying to decide between hiring a Massachusetts CPA, or going for a dental town CPA.

The advice to create the S-Corp now has absolutely nothing to do with what state the CPA lives in, in my opinion. It's a judgment call by the CPA plain and simple. An MA CPA may have made the same call.

That said, the question is, was creating any entity at that time the right choice? It probably was and I would have likely suggested it as well. However, I don't think I would have suggested S-Corp if MA accepts LLC's, which I believe it does.

If you plan on borrowing 100% or near 100% from a third party for your start-up make sure you talk to your CPA about S-Corp tax basis issues and how it affects the shareholders ability to deduct initial losses.

Thanks for the response Tim. I was wondering if it was more advantageous to hire an in-state CPA or an out of state CPA. I see posts about people asking for references for CPAs for their state on this forum all the time, so it makes me wonder why. Is it really that more advantageous for someone to hire a CPA that's based in their own state?

Primarily, you need to consider the expertise and skills of the CPA first and foremost, NOT what state they’re in, IMHO.

Secondarily, YOU have to consider what YOU'RE comfortable with. Some people prefer someone close by that they can walk or drive to for face-to-face meetings, I believe that's what drives the requests for "CPAs in my state". Others are comfortable with the long-distance professional relationship which has become more prevalent with the internet, webconferencing, skype, etc.

Even though we're based in MD, I believe our firm knows the surrounding state laws very well (that is, MD, DC, VA, PA) because we've always had clients in those areas.

I'll be the first to admit when we get a client out-of-state (other than the 4 I mentioned above) there's more work involved for us initially to get up to speed on the state and local specific tax laws like income, personal property & sales tax. However, because of the internet and our tax law library provider, all we really need to do is read up on it. The federal income tax laws apply to all states and many states follow the feds with respect to those taxes. So it's a question of learning about the entities they allow, how they tax them and the specific state laws on all the taxes.

Obviously the more clients you get in any one state helps you commit those state specific issues to memory.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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How Much Should a Dentist Keep in the Business Account?

2011-04-12T10:45:00.001-04:00

Suze Orman recommends 8 months worth of your monthly income for a "rainy day" fund in your savings account

What does a dentist keep in his business Checking and/or savings Fund.. For those slow months, accidents or facility issues can spring up on us. 6 months worth of Operating Expenses?

It directly conflicts with take home income in my case and I like keeping the two TOTALLY separate.

I also am the type that’s always on the lookout for a chart purchase, expansion, office acquisition - not so much CE and Equipment. And if I do purchase something of value and considerable money, should I buy cash or take a loan for the other 80 and stay liquid.

Any suggestions would be great.

In my opinion you want to keep your business account as low as possible. I generally suggest 1/2 months to one month’s expenses. 1/2 should suffice as a/r should cover the other half if something happens where you need to cover a full month. If you want to have a "business" fund, we suggest you strip it out of the practice, either as wages or S-Corp divs and set it aside personally and when the time comes for a large need you simply lend it to your practice and pay yourself interest.

Every business (practice) should also have a LOC available as well, maybe as much as 10% of gross available to borrow

We believe business accounts are more susceptible to fraud and theft. Staff can see how much is there when mail comes in. Depending on how it's delivered others might have access to it. Offices are more susceptible to outside theft. When cash balances get heavy small discrepancies are less likely to be noticed. If the practice gets sued can the cash accounts be frozen.

If you prefer $100k, why not take out $50k and place it in a personal savings account? You can always give it back quickly through a phone transfer.

We just think you need to be very careful keeping excess cash laying around in business checking accounts.

Tim - Correct me of I’m wrong but the reason I think you'd like to see the Checking account balance so low is so you don't get double taxes on Biz Income at the end of the year.

No, really has nothing to do with income taxes.

But what if you wanted to keep in 100-300K for a down payment for a piece of property or a office acquisition. At some point your personal income has to take a back seat to save this capital come up right?

Do you think it isn't worth saving it to that point? - also do you believe in Work Stoppage insurance?

But having that money sitting somewhere usually means you're going to pay tax on it and if you're an LLC or s-corp, that money will usually be taxed to you anyway. So why not take it out of the business and set it aside personally for future use. I’m not suggesting you strip the cash out of the business to spend, I’m suggesting that if you want to park a cushion of cash somewhere. I’d prefer a personal account, earmarked for business.

For the record, I like your advice given here....but for arguments sake...Say I wanted to go to Europe for a month.. Do you think that’s enough? FYI I am at 1.2/year MM with about 65% overhead. Seems like the treadmill may need to have a bigger cushion behind it to me.

In my mind that month’s money will dry up too quick

It may not be; however, as you've shown, you're thinking WAY ahead and I’m sure you'll have contingency plans in place.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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First Year Dental Practice Tax Questions

2011-04-05T10:58:00.001-04:00

2010 was the first year for my practice as a startup, a PLLC. We are showing a big loss.

Does that loss get carried over to my personal return so I get a refund? (I made money working for someone else and money as an employee of the startup.)

You should under the right situation, and I suspect you have the right situation. The question then becomes, do WANT to use a VERY large loss if it drops you into the 15, 10 or god forbid, 0 % tax brackets? Not if you can help it.

Taking losses at the appropriate tax brackets is key. I've seen returns where the taxpayer took as much loss as the tax code allowed and created negative taxable income. These taxpayers LOST the benefit of either their itemized or standard deductions along with their exemptions for that year. THOSE deductions CAN'T be carried forward. Depreciation deductions CAN be carried over if done correctly.

Good luck.

Thanks for the reply. I have a call out to my accountant to discuss this.

According to my EOY Statement of Income and Expenses, if I didn't pay myself any salary, the business would have shown only about a $20k loss. Since I paid myself, it shows a bigger loss than that. I don't believe that number includes any loan payments or depreciation.

Oh boy, wages? Is the PLLC being taxed as an S-Corp? If so, check to see if you have a tax-basis issue now....generally, without basis you cannot deduct losses...

Yes, taxed as an S-Corp. I'm not sure what "tax-basis" means, but my monthly report does have "Income tax basis" in the title.

Your accountant should know. Basically if you haven't put any money into the practice (i.e. funded 100% with bank debt) you may not have a tax basis unless the bank loan is in your personal name....

Yes, the bank loan paid for it all. It’s in the practice's name.

That doesn't sound promising. If you were looking forward to using some of those losses you should have waited to elect S-Corp. There may be a few little things you can do now, after the fact. Email me after you meet with your accountant and let us know what the deal is. If they say you can't do anything at this point shoot me an email if you want to chat off-line about it.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Is it a Dental Planning Retreat or a Vacation? What is the Difference?

2011-03-30T10:05:00.001-04:00

I have another general dentist friend and we want to vacation together, but not necessarily hit a dental course together. We practice in the same space, but have separate corporations. Is there any way to take a vacation together and run it through our respective businesses?

If you're asking if a personal vacation can be deducted as a business expense...absolutely NOT!

It sounds like you're asking if a business can have a retreat away from their main location to discuss future planning strategies for growth, new equipment, new procedures, staffing, etc. If that's what you're asking...absolutely.

Big businesses send their top executives away all the time for those business-type retreats. They sometimes even include team building activities like golfing, etc.

Thanks for the great reply. Is there a minimum number for a retreat? I assume it is 2 or maybe 3 dentists or staff.

Thanks!

Nothing in the tax code I've ever read about minimums...it has to be "ordinary & necessary" and of course "reasonable" (that's my term, not the codes)....

Documentation is the key: who, why, purpose, agenda, goals, notes or minutes of meeting, etc...

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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How to Make General Dentistry and Periodonist Combination Work in Dental Practice

2011-03-22T17:18:00.002-04:00

Hi.

I need your help and guidance.

How can a GP and a periodontist enter into a fair agreement? I have been practicing for 21 years in a small FFS office. Current lease is up and moving into a new 6 OP office. He is a young up and coming periodontist. We both have similar goals and standards and believe that we can build and expand together.

Your input and advice is greatly appreciated....

Thank you

I think the periodontist will have a problem. Where do periodontists get their referrals from? Generally from GP's I imagine.

You're a GP. If you want to refer to a perio would you refer to one who shares an office with another GP or would you refer to one with their own office or sharing with other specialists that don't compete with you?

I think this "up and coming" perio will find it difficult getting referrals from other GP's. Then again, maybe you can keep them busy 3-4 days per week with your perio referrals. If that's the case then you can chat with someone who has done partnerships with other doctors and especially between GP's and specialists as they are a different breed of partnerships for sure.

I have a client owned by 4 docs, one pedo and 3 GP's. One of the GP's also does pedo and ortho. They have an ortho, OS, endo, perio, etc. They are open 7 days a week and service the complete family from A to Z.

All the doctors (owners & non-owners) are employees of the practice and get paid accordingly, no stark issues.

Unless the perio has interests in other locations (as the majority of the non-owner docs do in the example above) then it could work for him; however, I suspect ONLY with the patients the GP refers.

I can assure you that the GP's around the client I mention above do NOT refer to this group of multi-specialty doctors for their specialty referrals. They are referring to those specialists that have their OWN office so that the patients come back to them...hopefully.

So my point is that this GP/perio "venture" could work; however, I think the perio will need to have other work in other locations to feed their family.

He will be running the Hygiene and Perio in my office. We are trying to figure out what is a fair percentage on his perio production?

Generally 35-45% for perio. It’s usually closer to 40-45%.

As for what percentage on Hygiene? 10% - NOT more than 15%. Even that might be a stretch on their hygiene production. Remember, you have hygiene compensation, hygiene supplies and of course OH.

Thank you

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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How Should a Dentist Account for a Third Party Finance Fee?

2011-03-15T16:47:00.000-04:00

If a patient's treatment plan is $1000 and they use a 3rd party finance company like Care Credit, the total amount I receive is something like $900 (for example). How do you account for the "finance fee" difference?

Currently I enter $900 as payment received and enter $100 as a write off. Is there an advantage to doing it another way?

In QuickBooks you enter the deposit as a split transaction:

$1,000 to fee income, revenue, whatever you call it, and

$100 (or -$100) as collection expense

$900 is your net deposit.

It's that simple.

If that was your ONLY transaction for the day and you ran a P&L statement it would look like this:

Income 1,000

Expense 100

Net income 900

Make sense?

PMS should show $1,000 payment.

So, if I have only accounted for the NET credit card or Care Credit payment on my QB (which for me is all that counts from an accounting perspective)--then I have essentially done the accounting, right? In other words, I cannot go back and claim an expense for the processing/finance fee?

Correct, no double dipping allowed…

This first appeared on Dentaltown.

Thoughts on Dental Start Up Consultants

2011-03-08T11:15:00.002-05:00

I am wondering if you have had experience with startup practice consultants and if they are worth it.

Thanks a bunch!!

I can't answer your question specifically; however I can tell you we picked up a client in December who started from scratch in April 2010 and used a start-up company that professed to handle everything. I can't comment on how they did on the location search, design, forecasting, etc., however, I can tell you they completely blew it on their entity selection\income tax advice.

Because of their BAD advice this poor doctor will have to come out-of-pocket $15k in taxes on April 15th of this year instead of benefiting from a tax loss that would have allowed them to NOT owe anything in April. Cash is VERY tight for them and this is going to be VERY painful them. We’re actually going to take some steps to alleviate the pain down to maybe $8k-$9k after the fact; still, it's not a pretty picture.

Make sure you consult with YOUR CPA when it comes to entity selection and income tax issues.

Tim, Thanks for your reply.

Regarding business entity -is there anything better than going forming a PLLC and doing the s-election?

It depends on the situation.

Did they make him a corporation? What went wrong?

They created the LLC then elected S-Corp status, and were suggested that the doctor take a salary too! Total loss was at least $50,000 which was created in part by the $30,000 in W-2 the doctor took. So not only could the doctor NOT use the loss to help offset the $30,000 that they took to help create the loss, they paid payroll taxes on the $30,000 as well....just plain dumb. Had the consultant suggested keeping the bank loan in the doctor’s personal name that would have been acceptable from an income tax perspective. Either way, the doctor is personally liable on the loan.

This appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Dentist Has IRA to Roth Conversion Question

2011-02-28T11:03:00.001-05:00

For someone who has maxed out their ability to invest in tax-deductible products (i.e. 401k/profit sharing/SEP), wouldn't it make sense to contribute money that otherwise would be invested in a taxable account to a non-deductible IRA and then immediately convert it to a ROTH? Now that the conversion income limits are gone, I would think this is an easy way to avoid taxes on the earnings going forward. You could invest $5000 for yourself and another $5000 for your spouse each year, unless they change the rules again.

Just make sure that NONE of your IRA accounts have pre-tax contributions or you WILL owe tax on a prorate portion of the $10,000 you want to roll over. People have asked me if they can do this and they've suggested that they'll use a different IRA account for the non-deductible contributions and just roll that over. This CAN'T be done. You MUST consider ALL of your IRA funds when considering a rollover of just ONE account.

If you do have IRA accounts with pre-tax contributions or earnings and your employer plan allows employees to roll their pre-tax IRA monies into the employer plan, you can do that leaving ONLY the after-tax contributions within your IRA and then roll to a ROTH without a tax issue.

Make sure you run this by your CPA!

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Dentist Has Questions About What Entity He Should Chose.

2011-02-21T10:28:00.002-05:00

I'm setting up a solo practice in MD and will do some independent contracting in MD, VA, DC. Which is advisable: S-Corp, LLC, PLLC?

It depends (typical CPA answer, right?)

Seriously. It depends on where you form the entity. For example, MD has the LLC, VA has the PLC, and I’m not sure about DC. It's easy to research though.

All that said, I’d like to address the one thing you mentioned about starting up. IF that's going to be funded through a bank I'd be leaning towards LLC/PLC so you don't get trapped with the S-Corp tax basis issue. Unless you get the loan IN your individual name and lend those funds to the S-Corp.

I'd have to ask you a couple of questions to determine if C-Corp would even be an option, but I doubt it.

Oh, and even IF you create the entity in say DC, if you work in the other states you generally have to register that entity in those states to do business and depending on which district or state is your residence you may wind up filing returns in more than one state.

Good luck!

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Should Dentist Let Seller Carry Loan or Get a Bank Loan?

2011-02-14T10:53:00.001-05:00

I am thinking about taking over a practice and the senior dentist said he would owner carry. Do you guys think that this is a good way to go rather than getting a loan through the bank? What would be a fair average interest rate should I be looking at? I'm guessing 6%. I would appreciate any input. Thanks

Jason Patrick Wood

There is a lot more risk to the Seller when there is an "owner carry back" and it is very atypical for a seller to carry the whole thing. Anything atypical is a red flag unless the owner can explain this with a reasonable answer. Typically when an owner will offer to "carry" it is because:

1. The practice is grossly overpriced.

2. There is something about the practice that dental lenders do not feel comfortable about.

3. The Seller has been trying to sell the practice forever and can't find a buyer.

Tim Lott, CPA

Jason, I’ll give the seller the benefit of the doubt? Maybe…

1. They really want to make it easy on the buyer by not having to jump through the third party lender process.

2. The seller wants to earn more on his money than the <1% they're currently earning on their savings account.

3. The owner doesn't want to pay the large commission on an annuity and wants to create their own, or

4. Maybe the seller wants to spread the tax bite out over many, many years.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Dental SIMPLE Plan Question

2011-02-03T17:10:00.001-05:00

I currently have a SIMPLE. I essentially put $1000/month into it or the $15,000 a year plus the 3%. I feel like I am paying too much tax along with the rest of the world. I want to adopt another plan but I am unsure of the costs per employee etc. I have 3 employees and would love to put away more for them but I’m just a bit unsure of cash implications...

1. One year’s performance does not make or break a retirement plan or any investment for that matter.

2. How have you factored the $15k into their overall compensation package?

I would agree though - if your retirement plan is consistently inefficient as it relates to costs vs. benefits and if you don't factor in the staff contributions when determining raises and bonuses, this plan may not be your best option.

Good luck.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Dentist Has Questions about Who to Send 1099s to.

2011-01-31T11:15:00.001-05:00

I know you have to give independent contractors 1099's when you pay them over $600 in a year. However, I cannot find a solid definition of what an independent contractor is. I know a corporation is not an independent contractor and does not require a 1099. What about LLC's (single member disregarded entities and those taxed as corporations)? Are we supposed to look up which entities are which types to determine whether they will get a 1099? It's not always easy to tell if Joe's Plumbing Service is a corporation, LLC, sole proprietor, etc. The dental lab I use is an LLC but I don't know if they are to be considered an independent contractor or not. How many of you send 1099's to your small dental labs?

You may want to read thru these links:

http://www.irs.gov/efile/article/0,,id=98114,00.html

http://www.irs.gov/instructions/i1099gi/index.html

http://www.irs.gov/pub/irs-pdf/i1099msc.pdf

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

The $1.6 Million Detail - A Costly Dental Mistake

2011-01-27T12:48:00.001-05:00

In November 2010, the Court of Appeals in Michigan upheld a lower court ruling and ordered the defendant to pay a total of $1,615,000 in damages and attorney’s fees. What did he do? The defendant, the seller in a dental practice transition, opened a new practice within the agreed upon restrictive covenant area. Only about 100 patients actually transferred, which represented less than 5% of the active patient base at the time of the sale. Even so, the awarded damages amounted to 80% of the purchase price plus over $42,000 in legal fees.

One of the primary provisions found in Purchase and Sale contracts and Employment, Independent Contractor and Partnership Agreements is a Restrictive Covenant, or Covenant Not to Compete. We are often asked whether these are enforceable in Florida.

YES, restrictive covenants ARE enforceable in Florida. In fact, a few years ago in Naples, a physician who opened up a practice on Marco Island had to pay $90,000 in damages plus legal fees and was prohibited from practicing in Collier County for two years because he violated the restrictive covenant from when he was an employee of an area physician.

That is just one example.

We are also asked questions that relate to the distance and time that is considered enforceable. Essentially, the restriction on the geographic area is situational and jurisdictional – it depends on where you live and what you are restricting.

Currently in Florida, the standard is that the area has to be “reasonable.” If required, the court will disregard the restricted area set out in the contract and define what is “reasonable.” This decision is usually based on:

1. Protecting the employer, buyer or remaining partner from damage that could be caused to the practice by a violation of the restriction and;

2. Protecting the employee, seller or departing partner from undue restrictions of the practice of their chosen profession.

Generally speaking, highly populated areas will generally have covenants with shorter distances whereas sparsely populated areas will have longer distances.

An example of an enforceable restrictive area could be a five to seven mile radius from the practice location in most metropolitan or developed areas of Florida. An unreasonable restriction would be a 25 mile radius from the same practice. On the other hand, it might be reasonable to enforce a 25 mile restriction in an urban area for a dentist that draws patients from a 25 mile radius or for a practice in a more remote or rural area.

With respect to time, Florida Statute §542.335 clearly provides the following restrictive covenant provisions:

1. For Employees or Independent Contractors: A covenant of 6 months or less is presumed to be reasonable

A covenant greater than 2 years is presumed to be unreasonable

For the time period between 6 months and 2 years, the employer must show that the time restriction is necessary to protect a legitimate business interest of the practice.

2. For Sellers: A covenant of 3 years or less is presumed to be reasonable

A covenant of greater than 7 years is presumed to be unreasonable

For the time period between 3 years and 7 years, the buyer must show that the time restriction is necessary to protect a legitimate business interest of the practice.

It is also made clear in the Statute that an injunction can be obtained from the court to prohibit the continued violation of a restrictive covenant and the court shall not consider any individual economic or other hardship that might be caused to the person. The prevailing party can also be awarded attorney fees.

The bottom line: Restrictive Covenants are enforceable in Florida and can be very expensive if violated. That said, Restrictive Covenants that are unreasonable will most likely not be enforced. Having an experienced professional who works with these types of agreements on a regular basis can prove to be invaluable (possibly worth even $1.6 million) whether you are buying or selling your practice.

This article is courtesy of American Dental Sales (ADS) Hy Smith, MBA and Stuart Auerbach, DDS

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Top Ten Mistakes Dentists Make When Filing Their Tax Returns - 2011

2011-01-17T15:12:00.001-05:00

Lance Jacob of the Dental CPAs has compiled a list of the top ten most common tax filing mistakes that he sees his dental clients making.

1. Filling out tax forms with an incorrect Social Security number. The IRS computers will automatically reject your deductions and credits if your Social Security number is wrong. This mistake seems careless and trivial, but it is paramount to have the right Social Security number when filing your taxes. Your social security number is your tax ID number, which is linked to numerous transactions such as income statements, savings account interest, and retirement plan contributions. It is also vital to claiming tax credits.

2. Double dipping on dependents for divorced taxpayers. Ill repercussions could result such as additional taxes, penalties, and interest charged. A child can ultimately meet the rules to be a qualifying child of only one person. Once divorced, your children do not duplicate out of thin air; therefore they cannot be claimed twice in taxes. The IRS does not allow both divorced taxpayers to claim a child as a dependent.

3. Not reporting non-deductible IRA contributions. Any contribution to an IRA, whether it is deductible or non-deductible, should be reported on Form 8606, so when you withdraw it you are not taxed on it. Plain and simple, all contributions to an IRA must be reported.

4. Incorrectly reported estimated tax payments. If your accountant instructed you to make quarterly estimated tax payments, be sure to let him or her know the details of the payment for each installment. Provide the check numbers, dates of payment, and the amount of each payment. What often happens is people claim they made the payments as their accountant told them, but did not keep any records and inadvertently forgot a payment or two. If the accountant includes all of the estimated payments on the return when they all were not really made, the IRS or state government will send a notice of tax due with penalties and interest.

5. Incorrect Federal ID number used on 1099 MISC. Although your accountant can easily fix this, the less the IRS has to contact you, the better it is. The IRS matches 1099MISC and the Social Security number or Federal Identification number used. If you provide services, and the client you did the work for issues a 1099MISC, be sure they know to use the federal identification number of your business and not your social security number. If they use the wrong number the IRS will send you a notice that you did not report income on your personal return, when in fact it was reported correctly on your business return.

6. Exceeding the mortgage interest deduction limit on Mortgage and home equity debt in excess of $1.1million. This error commonly falls as the fault of both the taxpayer and accountant. They only deduct the amount reported of the mortgage interest statement, Form 1098, and do not bother to check the amount of mortgage the taxpayer has. The tax laws limit the amount of deductible interest to the interest on the first $1,000,000 of home mortgage debt and $100,000 of home equity debt . So if you have a mortgage of $2 million, you can only deduct mortgage interest related to the first $1.1 million in total debt.

7. Standard mileage vs. actual expenses. Mistakes in this area come from inconsistent use of methods. If your car is for business purposes only, then the entire cost of its operation can be deducted. However, if the car is used for both business and personal use, only the cost of its business use can be deducted. The amount of your deductible car expense can be found using either the standard mileage rate method or the actual expense method. Some people will qualify for both methods but you must choose only one method when you start using the vehicle and continue with that method until you replace the vehicle. Be sure to figure your deduction with both methods initially to see which gives you the larger of the deductions.

8. First-Time Homebuyer Credit recipients unaware of the fine print. Those who received a First-Time Homebuyers’ Credit towards their purchase of a home settled on prior to 12/31/08 must begin repaying that money on 2010 tax returns. Now is the time to take a good hard look at the details of this credit. Many who accepted the $7,500 credit may not realize that it was in fact a loan, and the government will begin not-so-politely asking for the money back over the course of the next 15 years starting with 2010 individual tax returns. As with any federal money however, there is a lot of fine print to read into on this one.

9. Forgetting to tell your tax preparer you took an early distribution on an IRA; therefore, failing to calculate the early distribution penalty of 10%. If you are under the age of 59.5, a distribution on an IRA (including employer matching and profit sharing) is considered early, and subject to a 10% additional tax. This tax is in addition of other taxes that apply to the distribution.

10. Forgetting your signature on your return! If you were an artist, you wouldn’t forget to sign your masterpiece upon its completion, would you? You must sign your taxes for the IRS to process your taxes. Filing your taxes electronically is a foolproof way to ensure your taxes will not go unsigned. These software packages do not allow documents to be sent unless every step is completed.

http://www.walletpop.com/taxes/most-common-taxpayer-mistakes/

http://taxes.about.com/od/dependents/a/Dependents.htm

http://www.irs.gov/individuals/article/0,,id=218767,00.html

http://www.irs.gov/publications/p936/ar02.html

http://www.irs.gov/taxtopics/tc510.html

http://money.cnn.com/2009/09/24/pf/expert/home_buyer_credit.moneymag/index.htm

http://www.irs.gov/faqs/faq/0,,id=199762,00.html
You can contact Lance Jacob with additional questions or comments at ljacob@dentalcpas.com or (800) 772-1065. http://www.dentalcpas.com/

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

At Risk Rules for Interest in a Dental S-Corp Questions

2011-01-13T13:37:00.001-05:00

I borrowed X dollars to buy 100% interest in a dental practice. I'm actively involved in running the business. I contributed $0 initially. If I have a loss for the 2010 tax year, am I limited by the at-risk rules?

If you have no basis in the S-Corp you can't take losses. Since you elected to do an S-Corp instead of an LLC, did you at least get the loan in your personal name? Before you ask, a personal guaranty on a loan in a corporation name won't help either.

If the loan is NOT in your name, do you have access to any cash personally you can lend to your corporation to give you basis?

1. The loan is in my personal name. I incorporated 6 months after I purchased the practice.

I think you might be fine then based on this statement, would have to see the details of the "incorporation" in terms of the timing, tax returns, etc.

2. Duh. Can't believe I missed this one. The only cash I had was the cash I had in my sole proprietorship checking account when I incorporated. I created a new checking account when I incorporated and contributed all of the cash-on-hand to the new corporation. This would be my basis, right? What document would I need to provide/create to show this transaction?

Simply the transaction itself. What I mean is if you have a personal checking account showing a transfer of $10,000 and on the same day the corporate account shows a deposit of $10,000 and you have the deposit ticket, you'll be fine on the documentation.

Why did you decide to incorporate 6 months after you purchased the practice?

During the financing phase of the practice acquisition, the bank asked me if I was planning to incorporate prior to funding. When I said "yes," they said that funding would be delayed up to 6 weeks. Time was of the essence, so I decided to move forward as a sole proprietorship.

I waited until the end/beginning of a quarter to incorporate to make payroll taxes, etc. easier to calculate.

Thanks for the info regarding my basis.

Got it. Thanks for the reply. 6 week delay, wow! Looks like it may have worked out as it was.

BTW - not that this applies to you, but for anyone else reading this post in the same or similar situation, if you have access to a personal LOC or HELOC, that's another source of cash to get you basis.

Thanks and right back at ya.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Dental S-Corporation Questions

2011-01-07T18:40:00.002-05:00

I just formed an S -Corp from Sole P….what can I write off in taxes from one and not from another? EX: health insurances, Dis ins, MP ins. In S-cop, I am an employee now, what can I give myself in benefits (ex. health Ins, dis. ins, MP ins) and still tax write off? Do I need to provide that do all of my employees?

Generally, from an income tax perspective there's very little else an S-Corp offers that you can't get from a sole-proprietor.

Why did you form an S-Corp in the first place? What were you looking to achieve? What benefits were you looking to gain and how do they compare to the additional costs of an S-Corp?

Seems to me that if you got advice on the reasons to form an S-Corp, that advice would have considered these questions AND the ones you're asking.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Year End Dental Tax Deduction Questions

2011-01-01T20:50:00.001-05:00

Let’s say I show 50K in profits after everything has been paid in full, including any taxes on previous distributions.

If you're referring to income taxes they are not a deduction from the practice.

Let’s say I purchase a new op before year’s end.

Chair, light, cabinets, computers, isolight and it cost 25K. Can I then depreciate the 25K I spent on the op this year at 100%?

So now I have 25K of profits left.

That would leave me with a profit of 0K on paper.

Only if you deduct it twice, which you can't.

Then I could write myself a distribution of that left over 25K without paying one cent to taxes?

Nope, you'll owe tax on $25k plus any profit you used to pay prior year income taxes.

Another question: we are looking to hire another employee. I read/watched on TV…there will be a 6 month payroll tax holiday on new hires. Is this true? Do I have to wait until Jan. 2011 to hire or can I hire now in December?

I don't think anything has been passed yet. If you need an employee then hire them. It’s that simple

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Should Dentist Buy-In as a Partner or Purchase Solo Dental Practice?

2010-12-21T14:10:00.001-05:00

Let me start off by saying the decision can only be yours and if the numbers are similar from a cash flow perspective it'll come down to whether you believe working alone is better than working with a partner. If it's all about the numbers here are my comments:

Practice #1- Rural setting- father/son practice. Father has been practicing 30 yrs. last 10 yrs have been working 2.5 days a week with 3 months off. The son has been there 12 yrs and works 4 days (7hr days) a week with 7 weeks off.

I would be buying the father's percentage of production. Purchase buy-in would be around 225000.

Does that make you a 50% owner? If so and that means the practice was valued at $450k, does that fall within a reasonable range of value? Based on the revenue it seems to be.

They refer all ortho, implants, and most 3rd molar surgery.

What does that mean? Are these the procedures you do? Any other procedures you do that they don't?

Roughly 3000 to 3500 patients.

Maybe in charts. If their average hygiene time is 45 minutes or more you're likely looking at approximately 1,500 "active" patients. What's the breakdown of the $900k in revenue between hygiene and dentistry? New patients per month?

They do no marketing, no website, and really pretty comfortable with the situation.

So how many new patients do they get and where do they come from? Do they participate with PPOs? If so, what percentage of the practice? Why don't they market? Only game in town?

The son is open to expanding but doesn't want to work anymore than he already is.

What’s the reason to expand? Are you talking space or both space and hours?

Compensation is paid out at 40% collections and then split any profits left after expenses paid.

How are profits split? Ownership? Collections? Hybrid method? Is hygiene separated out and split differently?

6 ops and runs around 50-55% overhead. Office produces around 900000 a year.

The overhead looks good and about right for a multi-doctor practice.

Practice #2- rural setting as well. Solo practice- 11 years- 4 days a week with 4-5 weeks off a year.

Why are they selling?

Office does most aspects of dentistry ie cerec, soft tissue laser, hard tissue laser, some ortho, most endo, most OS, and runs a very efficient practice with 5% marketing budget. I am able to do implants, some ortho, and most 3rd molar ext.

Do you do the same? What kind of marketing for $37,500 per year?

Booked 1-2 weeks out. 1500 active patients. 4 ops. produces around 750000 a year with about 65% overhead. Building is also for sale

I’d say no more than 1,000 "active" with only $750k in revenue. Again, of the $750k, what's hygiene and what’s dentistry? New patients per month? PPOs or FFs? Why is OH 65%? What's higher than average and why?

Practice would be sold for 500,000 and he would be willing to finance office purchase if I want.

Will they finance the practice AND building or just the building?

Which one is better?

From what perspective? Purely from a numbers perspective there's not enough information.

I only hear negatives about partnerships but this particular opportunity seems better than most.

I hear negatives about marriage from divorced people also...and occasionally from married people

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Dentist Disability Insurance Premium Question

2010-12-14T15:48:00.001-05:00

We are considering adding a disability insurance policy for the doctor and practice. Do you have a company that you have had a positive experience with? Thanks for the help!

It is a crap shoot. If the average premium was $5k/yr over the 40 years, $200k in deductions, therefore, at 40% saved $80k in taxes vs. getting disabled, receiving $140k PER YEAR generating $42k in tax (assuming 30%) and you'd eat into your $80k savings in 2 years.

Personally, if I become disabled, the $2,000 per year tax savings isn't worth the annual tax cost of $42k if I become disabled.....that's just me.

I have a client who's been collecting $140k disability per year, tax free, since 1986...I can't remember how many times he's thanked me for advising him NOT to deduct those premiums.

On the strategy of reimbursing after the years premiums are paid, I also believe that's a crap shoot. It may not have been challenged yet under audit (I've not heard of any cases), maybe because it hasn't been found (after all you have personal checks to vouch you paid personally, right?) If it gets caught AFTER one becomes disabled....that annual benefit will be a HUGE incentive for the IRS to attack that strategy. That's a headache I don't want if my family is relying on ALL that tax free income.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Should General Dentist Consider Opening a Second Office?

2010-12-09T10:11:00.001-05:00

How many GP's have two offices? I know this is very common for specialist, but not so much for GP's.

I am flirting with he idea of doing a second start up with a partner. We both have our own practices, mine open Tuesday-Friday 10 hour days and his is Mon-Thurs.

My first start up will be two years March 2011, and has been very successful. It would still be my primary office. This second start up would ultimately be for an associate to run. Hopefully an associate that would want to become a future partner. We were thinking of initially opening 3 days a week, I would do Mondays, he would do Fridays, and we would alternate Saturdays.

I think worst case scenario is having it take 6 months before it could support an associate. That would mean I would be busting ass...alternating between two offices and working 5 days a week one week and 6 days a week the next. Dentistry is very demanding and that pace would be pretty grueling to say the least.

Thoughts? Comments? Experiences?

Good luck. A few can be successful at this WHILE maintaining the success of their existing practice.

Most of the clients we've had that did this lost focus on their existing practice and it began to falter. Unless your current practice is running on all 8 cylinders AND can continue to do so while you begin focusing your efforts elsewhere, be prepared to spend a year getting your current practice back in shape after your done giving the other practice all of your attention.

Point: don't lose focus on the practice that's paying the bills and feeding the family.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Dental Office Mortgage Questions

2010-11-30T22:06:00.001-05:00

I am looking to refi/modify my current office mortgage. I have $441,000 left at 6.4% for 15 years. The same bank will modify the terms to 10 years at 5%, but they want a $5000 fee. I was wondering what types of rates others are currently being offered. Any help?

Can you clarify? Is this a mortgage against the real estate your practice operates from OR is this a practice loan you started or bought the practice with? Some people use the term "mortgage" pretty loosely.

The loan is for the office building only, it has gone up to 6.4% and was a construction loan turned mortgage. I am using a local bank and they offer only 5 years fixed after which it can go 2.75% above the Federal home loan bank of New York rate. Currently it has gone up to 6.4% which I thought was very high with interest rates so low. I called them and they offered to lower the rate to 5% and shorten the term to 10 years (my request) but they want a $5000 fee to do so. I feel the $5000 is excessive to just modify the loan but I was wondering what other banks were offering for commercial mortgage rates. The office building is assessed at $585,000 and we owe $440,000.

So they're charging you a little over one point to modify the note. On one hand, you'll be saving a ton of money which will more than offset the $5k; however, doesn't hurt to ask them what's behind the $5k. Why so high? What are their costs in modifying the note? The higher cost now MIGHT be in lieu of a pre-payment penalty OR to make up for some of the "loss" they're taking on reducing their rate from 6.4.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Scratch Dental Office - Is the Profit Margin Too Low?

2010-11-17T11:06:00.001-05:00

I am in my 4th year of a scratch startup and the practice's collections are on track to reach $1.2 mil this year.

YTD the profit margin is only 16%.

I'd say 10-15% AFTER "normal" comp for the doctors.

I know the Levin Group says it should be 38-40%.

That's what a SOLO doctor NETS after their overhead; you might be comparing apples and oranges.

The office manager is my wife and doesn't get paid anything except part of my salary.

You should factor in a cost for her when arriving at your OH % if you're going to compare to other practices or general statistics.

We are a heavy PPO/Medicaid practice with 84% of our patients with insurance.

This will usually create higher percentages across the board as your collections will be lower as a percentage of your GROSS production.

Here are my individual expenses:

Staff Wages/Payroll Taxes/Associate Pay 49.3%

What’s the percentage without the associates component?

Facility 4.5%

Dental Supplies 8.8%

Lab Fees 2.7%

That’s low and maybe why your expenses percentages are higher. Your more expensive procedures might be lower compared to the typical practice.

Advertising 4.9%

Office Supplies 1.2%

From what I've understood the staff wages/payroll taxes/associate pay should be 22-27%

Correct. Forget what it MIGHT be with an associate. That runs a wider range.

Office Manager ... included with my salary

Front desk $14/hr

Floater Assistant/Front Desk $16/hr

Expanded Assistant $19 / hr

Expanded Assistant $ 22.25 / hr

Expanded Assistant $ 21 / hr

Expanded Assistant $16 / hr

Hygienist $29 / hr

Hygienist $29 / hr

Hygienist $29 / hr

Hygienist $34/ hr

Front Desk $16 / hr

Dentist #2 $500 / day or $83.33 per hour

If you weren't married would you even need an OM?

Now, this doesn't leave a whole lot of money for me. I'm not doing horrible, in fact I'm probably doing just as well as most associates plus I only see patients 24 hours a week. I have every Friday off and I've just taken my 6th full week of vacation this year so I see the good side of things. I just think with some good management things could be even better. Thanks for any advice.

Here is the complete Expense Report:

Expense

4000 • Personnel Costs

4010 • Staff Wages 31.71%

4020 • Payroll Taxes 8.71%

4050 • Contract Labor 0.73%

4070 • Associate Wages 8.13%

Total 4000 • Personnel Costs 49.28%

4100 • Facility Costs

4110 • Rent 3.04%

4120 • Utilities 0.79%

4130 • Telephone 0.38%

4140 • Cleaning & Maintenance 0.2%

4150 • Building Repairs 0.1%

Total 4100 • Facility Costs 4.51%

4210 • Dental Supplies 8.76%

4220 • Laboratory Fees 2.69%

4230 • Office Supplies 1.22%

4240 • Interest Expense 1.99%

4250 • Advertising 4.88%

4260 • Bank Service Charges 0.55%

4270 • Gifts 0.08%

4280 • Legal & Professional Fees 0.4%

4290 • Liability Insurance 0.52%

4310 • Postage and Delivery 0.13%

4340 • Uniforms 0.06%

4360 • Depreciation Expense 3.29%

4370 • Sales Tax 0.03%

6560 • Payroll Expenses 0.17%

6570 • Payroll Fees 0.03%

Total Expense 78.58%

Net Ordinary Income 21.42%

Other Income/Expense

Other Expense

4410 • Doctor's Salary 3.63%

4420 • Doctor's Payroll Taxes 0.29%

4470 • Professional Development 0.23%

4480 • Malpractice Insurance 0.03%

4490 • Licenses 0.09%

4520 • Meals & Entertainment 0.44%

4530 • Dues and Subscriptions 0.1%

4540 • Charitable Donations 0.04%

8000 • Ask Accountant 0.23%

Total Other Expense 5.07%

Net Other Income -5.07%

Net Income 16.35%

Some of your expenses percentages don't make sense:

For example, payroll taxes generally aren't much more than 8% of gross payroll. Between staff and associates you show wages of 39.84%. So based on collections of $1,200,000 your wages s/b approximately 478,000 and 8% of that is $38,000, which should be the payroll tax cost for JUST those wages. $38k of $1.2mill is 3.2% and you say they're 8.71%? That's about $60k higher than I would expect. What else are you putting in there? Is the 39.84% NET or gross wages? Also, do those payroll taxes include yours? If so, that could explain about 1%.

I'd start with the 78.58% and eliminate the associate and their payroll taxes (call it 9%), remove the interest & depreciation of 5% and now you're at 64.58%, a little more in line to the 57-60% we see, still high by say 6%. Supplies is high by 2%, advertising and marketing high by 2%, staff wages if gross are too high by at least 4%, payroll taxes are off the charts for some reason, some may be your payroll tax.

If I were you I'd want to make sure I'm starting with clean, comparable OH stats before jumping to any conclusions.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Is it Accounts Receivable or Collections? Dentist Needs to Know the Difference.

2010-11-09T22:20:00.001-05:00

I just noticed that my accounts receivable, or at least the number I get from my PM software is much higher than what my accountant reports on a PnL statement.

A couple of comments:

1. By "accounts receivable", are you talking about the balance at any given point in time OR the collections figure from an A/R report?

2. It sounds like you're describing the "collections" that are on your P&L report and if you've asked your accountant to "report" on a cash basis, then it's being reported correctly.

3. I hope you're not trying to compare an A/R balance with collections.

4. If you are comparing PM collections with accounting record collections there could be several valid reasons why the numbers don't match: do you use care credit? Do you deposit cash payments (don't have to answer that here ;-))? Are your PM collections net of patient refunds? Are the P&L collections net of refunds?

Does your PM collection number include any other "credits" not actually collected?

Shouldn't he be looking at the "actual" sales from the PM software (Dentrix in this case)?

Only if you're paying him to look at them. If you're only paying him to produce cash basis P&L's for income tax prep purposes there's no need for him to see your PM reports.

And then there's the accounts that are paying in installments, so there's a lot of sales earned but not collected that he is not accounting for.

Now it sounds like you’re talking about PM production, NOT collections.

Also what happens when we have to write off a certain amount , either because the patient or the insurance company didn't pay, how is that recorded for accounting purposes? Should it be?

In the PM software yes. For tax or cash-basis P&L purposes, no.

Lastly, have you asked your accountant these questions and ask him to help you understand?

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Was Fired Dental Associate Classified as an Independent Contractor Incorrectly?

2010-10-28T11:01:00.001-04:00

I just got canned yesterday because my boss found out I was shopping for a practice...

Now that I have some free time on my hands, I'd like to organize my finances.

The other associate that works there claims to be an IC.

The specialist claims to be an IC.

They both tell me how great it is to be INC. I have yet to incorporate.

I'm uncertain as to my status, and I'd like to get this straightened out.

I work(ed) Mon-Thurs. 9am-6pm.

My schedule was determined by the front office.

I don't get to keep the patients.

All tools, supplies, etc were provided by the employer.

So what now? Is there an easy way to get a ruling as to whether I'm an employee or IC?

Quote Jason P. Wood (Dental Attorney):

NO CONTRACT!?!?!?!? That is great news!!!! For you, not the owner.

1. Patients are yours for the plucking

2. You may want to let them know that you feel "uncomfortable" at being classified as an IC and are going to inquire from the IRS as to whether or not you in fact were, just so you can sleep better at night.

3. You can set up shop next door and no one can stop you.

Thanks for the info so far... I will file an SS-8 inquiry with the IRS.

Please keep the comments coming though. I'm sure there is more to it.

I would also appreciate information about any personal experiences with IRS misclassifications.

Quote Tim Lott, CPA, CVA (Dental CPA):

How long were you working there? Why are you even asking these questions now AFTER you've been canned? Why didn't it dawn on you to ask the question after your first check? Sorry, ignorance isn't an excuse in the eyes of the IRS. I’m not trying to be mean, those are just the facts.

At this point if they did not withhold taxes and you were not provided a paystub detailing your tax withholdings as an employee then you're an IC and by NOT questioning it after your first check I'd say you accepted that fact by default (or by your actions, or inactions) and you should just deal with it at this point.

That means figure out your net taxable income as an IC. Determine how much you want to contribute to a retirement plan. Determine how much home office expense you have to do your admin\books for your business. Determine the business use of your automobile and estimate if you owe any estimated taxes from Sept 15th.

I just think it's WAY too late to cry foul on the EE vs. IC issue AFTER you've been canned. You should have been raised after your first check if you were really concerned about it.

Just my opinion.

Just got my final check in the mail... and of course, it was short.

I guess the trickery and deceit continues.

Again, the EE vs. IC issue should have been addressed BEFORE you started or immediately after your first check. I suggest you work with what is and continue to move forward instead of worrying about what should have been. Certainly call them to the carpet on the amount you are still due.

P.S. I doubt you'll find "if someone else pays your assistant’s wages you’re an employee" on any government agencies checklist to determine EE vs. IC status. These checklists aren't industry specific.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Dental Fee For Service versus Dental PPO - Which Makes Better Sense?

2010-10-22T16:30:00.001-04:00

I'm analyzing things right now and seriously considering going in-network with MetLife (PPO).

I have a FFS office now, and am only "in network" with Delta Premier. Although I am busy, I have extra capacity in the office--about 15% idle time. I advertise heavily and average 10-15 NP/month excluding emergencies. My area is competitive.

I've done a thorough fee analysis and had Charles Blair do a PPO analysis. Essentially I'd take a 15% hit off my normal fees on MetLife patients.

I currently have around 100 active MetLife patients now. MetLIfe is paying 100% of my preventative fees, but they are an utter incomprehensible mess when it comes to restorative. On crown/bridge my fees are generally within MetLife UCR, maybe off by 10%.

But I'm getting more and more questions from patients, especially on restorative, that basically ask My insurance says I save money by going to a network provider....and I can't argue with this.

My question is: How do you know when to need network participation? Has anyone gone from FFS to PPO, and what are the results?

We just met with a client to review their 6-month numbers. His gross production was up $44k and his write-off's were up $64k, so NET production was down $20k. So this guy worked harder to make less, why?

He wanted to be busier. He joined a few more PPO's including MetLife and got the influx of patients he wanted. Unfortunately they took the chair time of other better paying PPO patients and therefore made LESS money seeing MORE patients.

He had NO idea until we presented the numbers.

Make sure you DO THE MATH for YOUR specific situation!

Sandi can help you make the best decision!

Just to be clear, he produced $44k more and wrote off $64k more; therefore collected $20k LESS. He truly saw MORE patients and collected LESS. Not to mention the additional costs associated with that additional GROSS production of $44k. Maybe $4k in costs so he TRULY EARNED $24k LESS and worked harder to do that.

In THIS case it clearly backfired on the doctor. If there's idle chair time and it can be filled with something, generally something is better than nothing as long as the ADDITIONAL costs do not outweigh the ADDITIONAL collections.

I think you're on the right path. I’ll try and make it really simple. Let's compare 2010, 6 months to 2009, 6 months:

2010, 6 month production was 1,044,000 and 2009, 6 month production was 1,000,000.

2010 "write-off's” were 364,000 and 2009 "write-off's" were 300,000 (write-off's = what insurance DOES NOT PAY)

Therefore, NET production through 6 months of 2010 was $680,000 and it was $700,000 through 6 months of 2009.

NO FEE INCREASES IN 2010 FROM 2009 FEES.
This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Dentist Should Distinguish Between Needs and Wants for Bank Loan

2010-10-15T13:43:00.001-04:00

I am in the process of refinancing my practice loan. I have $180K left on the loan at 6.25% and a credit line of 30K with a variable interest rate. I have an offer to consolidate the loan and the credit line for a total loan amount of $210K at 3.99% in a SBA 5 year loan. Rate would be lower if paid off faster.

My financial advisor loves the cheap money and wants me to take more "working capital" money out to either buy equipment or pay other higher interest loans. The practice revenue is $840K gross collections.

The practice was purchased in 2008 and is in need of new dental chairs/delivery systems for the two restorative ops and leasehold improvements like new flooring, re-staining of cabinets, new lighting, and updated sinks. I am also considering Cerec technology.

The banker tells me the cash flow can support a larger loan amount up to about 300k at the fixed rate but they want specifics as to what would be purchased and a 90 day timeline.

I am feeling pressured as I had not planned to do the improvements now. The banker also says that I could take out a separate loan when I have a better plan for the renovations/purchases, but my financial advisor doesn't like this option due to the interest rate risk.

Please advise on what steps you would take in this situation.

Jason P Wood

3.99% fixed? That's unheard of so take it.

Yes, of course I'll take it, but I need to figure out what to do about the extra 90K? I have no current business plan for the equipment.

Tim Lott

What are the other "high interest rate loans"?

You say you need new things, but just not now. When?

I agree, 3.99% is cheap, cheap, cheap. If I had a NEED for the $90k in the next 12-18 months I'd have to grab it and park it until I NEEDED it. If these purchases are 24+ months away, the longer in the future the "need" is, I wouldn't take the extra $90k.

Just make sure you know the difference between "needs" vs. "wants".
I am looking to replace my 2 1978 Pelton Crane restorative chairs with new chairs and delivery systems. I'm looking into ADEC and Belmont and do not have quotes yet as I'm waiting for the CDA convention Sept. 10th to test out all of the chairs. I feel I NEED the new chairs for ergonomics as I currently am using rear delivery and it is killing my back. The new chair purchase, though, brings up other redecorating items in the office.

One thing leads to another and another. I am absolutely ready to get the chairs and delivery systems, especially at this low rate, but I'm not sure I'm ready to re-stain cabinetry, do new flooring, repaint the office and do the new light fixtures just yet. It would involve closing the practice for a period and we did that already this year for some other renovations. So, I could try to replace the chairs and delivery systems now and do the rest later.

Obviously it is good to have a master plan and timeline for the renovations which I do not have right now. I need to get a decorator and contractor out to my office first.

The other loans at a higher interest rate are personal loans- mortgage and line of credit on my home. We are trying to re-finance the house at a lower rate and need to put more principle toward the home for the lender to re-finance.

So, this extra cash from the business loan after doing the chairs would allow me to transfer some of the money from my current business savings account to a personal use and save me about 12K per year after the mortgage is refinanced. The refi of the dental practice is going to save me 4K on the year, so between the two, a total of 16K per year savings.

But, the bank will only lend for equipment and improvements that are actually done. My financial advisor is trying to find a way around this and just have the bank categorize it as "working capital", but I doubt it will happen.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

How to Buy a Dental Practice, Part 4 - Record Keeping and Post Sale Questions

2010-10-04T18:01:00.001-04:00

As Dental CPAs, we often receive calls from dentists looking to purchase a dental practice. We have put together a series of videos to help dentists answer the question, "How Do I Buy a Dental Practice?".

In this video we discuss how to wrap up the transition process, chart of accounts set-up, record keeping, and post sale questions. For more information visit our website: http://www.dentalcpas.com/

View the How to Buy a Dental Practice, Part 4 - Record Keeping and Post Sale Questions video.

Tim Lott, CPA, CVA

tlott@dentalcpas.com

www.twitter.com/dentalcpas

http://bit.ly/DentalCPAsonFacebook

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

How to Buy a Dental Practice - Entity Selection

2010-09-27T12:36:00.001-04:00

As dental CPAs, we often receive calls from dentists looking to purchase a dental practice. We have put together a series of videos to help dentists answer the question, "How Do I Buy a Dental Practice?". This video deals with entity selection. For more information visit our website: http://www.dentalcpas.com/ or email us at info@dentalcpas.com

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

How to Buy a Dental Practice - Due Diligence

2010-09-21T13:38:00.001-04:00

As dental CPAs, we often receive calls from dentists looking to purchase a dental practice. We have put together a series of videos to help dentists answer the question, "How Do I Buy a Dental Practice?". In this video we discuss structure, tax implications, financial due diligence, space/lease issues, financing proposals, letter of intent and seller compensation amongst other things. For more information visit our website: http://www.dentalcpas.com/ or email us at info@dentalcpas.com

How to Buy a Dental Practice - Due Diligence

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

How to Buy a Dental Practice - Setting the Asking Price

2010-09-14T11:01:00.002-04:00

Here is the next video in the "How to Purchase a Dental Practice" which addresses the process in setting an asking price for a dental practice.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

How to Buy a Dental Practice - Overview

2010-09-08T10:32:00.001-04:00

We are frequently asked by dentists, "How do I purchase a dental practice?"

To answer some of the basic questions, we have put together a series of videos.

The first video, "How to Purchase a Dental Practice - Overview" can be seen here.

http://www.dentalcpas.com/

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Protecting Your Dental Patient Base

2010-08-30T09:39:00.001-04:00

Our friends, Patrick and Jason Wood, the Dental Attorneys, have kindly allowed us to publish this timely and important article.

PROTECTING YOUR PATIENT BASE

By Patrick J. Wood, B.A., J.D. and Jason P. Wood, B.A., J.D.

As with many successful doctors, you may one day wish to hire an associate to work with your patients. Naturally, you will want to be sure that if your associate leaves the practice for any reason, he or she can't take your patients with them. At this point, you may wish to contact an attorney specializing in the medical/dental field and ask he or she to draft an employment agreement covering these concerns. Depending on that attorney's level of expertise, you may not end up with an employment agreement that prevents patient misappropriation. This article is designed as an overview of what your attorney should know when drafting your employment agreement.

In the article that follows, we discuss the two most common tools utilized by attorneys in preventing an associate's misuse of your patient base. This article covers the effectiveness of non-competition agreements and trade secret agreements typically used in employment agreements.

Non-Competition Agreements

Business & Professions Code §16600, enacted by the California Legislature in 1941, states the strong public policy against restraints on a person from engaging in their profession, by stating "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind, is to that extent void." (B&PC §16600). Notwithstanding this language, the California legislature also enacted B&PC §16601 and §16602 in order to provide limited exceptions under which non-competition agreements would be enforceable. These exceptions include the following situations where a non-compete clause may be enforced:

1. The sale of the goodwill of a business wherein the seller agrees not to compete.

2. The sale by a shareholder of all of such persons shares in a corporation.

3. The dissolution of a partnership by partners who agree not to compete.

4. A sale of an individual partner's interest in a partnership, wherein the remaining partner or partners carry on the business.

5. The sale of all or substantially all of the operating assets, including goodwill, of a corporation or its subsidiary or division.

The applicable code sections also provide that the seller agree "to refrain from carrying on a similar business within a specified county or counties, city or cities, or a part thereof, in which the business so sold.... has been carried on," provided that the buyer or any person deriving title to goodwill or shares, "carries on a like business therein." B&PC §16601 (also see B&PC §16602). The foregoing restrictions also apply to the sale of interests in limited liability companies, but since medical professionals cannot form limited liability companies to operate their practices in California, this article will not attempt to deal with such entities.

There have been many attempts by physicians and dentists to have non-competition agreements apply to their associate doctors. In Bosley Medical Group v. Abramson 207 Cal. Rptr. 477, 161 Cal. App. 3d 284, the California Court of Appeal denied an attempt by a medical group to enforce a covenant not to compete against a plastic surgeon who had left employment with the group. The surgeon's employment contract provided that when he left the group, he must sell his entire stock interest back to the corporation. The court found the transaction to be a sham designed to avoid the prohibition against non-competition clauses, as the surgeon had been forced to buy a non- controlling interest in the corporation as a condition to employment, and was forced to resell the interest upon leaving. In order for the non-compete clause to be enforceable, the court said the interest sold must be substantial and must represent the goodwill of the corporation. While Bosley was later limited to the specific facts raised therein in the case of Vacco Indus. v. VandenBerg (1992) 5 Cal. App. 4th 34, 6 Cal. Rptr. 2nd 602, the principal of Bosley was affirmed in Vacco, in that if the court found that a stock sale was a sham device to impose an otherwise illegal non-compete clause on the shareholder's future activities, it would not enforce it.

The courts have consistently held that employment agreements containing non-competition clauses preventing the employee from operating a similar, competing business in the same area, are not enforceable unless the provisions of Business & Professions Code §§16601-16602 are met; i.e., either the sale of goodwill or the sale of a business under the conditions outlined above. See for example, Golden State Linen Service, Inc. v. Vidalin (1977) 137 Cal. Rptr. 807, 69 Cal. App. 3d 1; see also Thompson v. Fish (1957) 152 F. Supp. 779. In one amusing case, involving the radio station mascot who dressed up and performed in a chicken suit at San Diego Padres baseball games, the court refused to enjoin the "chicken" from appearing at other baseball games and events wearing a similar chicken outfit, stating that since the "chicken" did not wear the radio stations call letters or claim that he represented the station, this was not competitive, even though the "chicken" continued to play the same fluid, clownish role he created spontaneously while serving as the station's mascot at the Padre's games. KGB, Inc. v. Giannoulas (1980) 164 Cal. Rptr. 571, 104 Cal. App. 3rd 844.

Generally speaking, non-competition clauses contained in employment agreements are not enforceable under current California law, and it is our policy to discourage the inclusion of such provisions in associate employment agreements. In California it is well established that such provisions are unenforceable in such employment contracts, and including them in employment contracts raises a red flag easily seen by a competent judge.

Trade Secrets

What then can a doctor do to protect himself and his patient base when hiring a new associate? The answer lies in preparing carefully worded, trade secret provisions providing that the patient lists and identities are secrets of the owner-doctor, and also providing appropriate sanctions which may be enforced by a judge.

The state of California enacted the Uniform Trade Secret Acts in 1984 (later amended) in an attempt to codify existing case law. This law has now been adopted in 42 states and the District of Columbia. California's version is contained at Civil Code §3426.1-3426.11. It sets forth provisions under which an employer may seek to bar the misappropriation and misuse of trade secrets by employees and former employees. The definition of "trade secrets" under Civil Code §3426.1 is information that "derives economic value, actual or potential, from not being generally known to the public or to the other persons who can obtain economic value from this disclosure or use; and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." CC §3426.1. In dental and medical practices, patient lists clearly have independent economic value, and are not generally known to the public or to other persons. Provided doctors takes reasonable efforts to maintain the confidentiality of those patient lists, the lists constitute trade secrets which are protected under such law.

In cases interpreting what a trade secret is for purposes of enforcing such restrictions in an employment agreement, the courts have generally concluded that the employer must demonstrate that the information is confidential, that the employer took steps to maintain that confidentiality, and that the information on the lists is not information that can be readily ascertained by most people. One of the most common areas of dispute regarding trade secret cases arises where former employees use customer lists provided to the employees while employed. In the medical/dental practice situation, these lists represent goodwill, and are often the most valuable assets of the practice.

The issue of whether customer lists are a trade secret largely depends on whether the names and other pertinent information, such as the amount and type of insurance they have, is confidential and not easily learned by a competitor. In Ingrassia v. Bailey (1959) 172, Cal. App. 2nd C.A. 2d 117, 122, 341e.2d 370, a catering route owner sought to enjoin the defendant from soliciting the owner's industrial catering customers (employees of industrial plants), arguing that information concerning these employees was confidential information, as the caterer made the scheduling of trucks to make efficient stops at the right times, knew the number of employees interested in the service, and knew their particular preferences in food and beverage. The defendant argued that since the companies served could easily be ascertained from phone books and directories, it was not a trade secret. The court held that such lists were trade secrets, as this specific information was not easily discoverable. In State Farm Net. Auto Ins. Co. v. Dempster (1959) 174 Cal. App. 2d 418, 426, 344 P. 2d 821, a case analysis to the medical/dental field, an insurance company tried to prevent its former employee, an insurance salesman, from soliciting insurance clients of the company. The court found that activities of the defendant while working for the insurance company in developing special knowledge of the customer's insurance habits, including the expiration dates of their policies and the vital statistics of the policy holder, were trade secrets.

In a case with a different outcome, the California Supreme Court ruled in Aetna Bldg. Maintenance Co. v. West (1952) 39 C2d 198, 246 P2d 11, that if customer identities were easily discoverable through consulting business directories and phone books, the lists did not constitute trade secrets. Other cases have similarly held that where the customers names were readily ascertainable through public records, telephone directories, trade directories, and similar sources, that the customer information could not be considered a trade secret absent other special, "hard to find" information about the customer, such as the type found in the State Farm Net Auto Insurance Co. case cited above.

In a professional practice, particularly in a dental practice situation, it can be persuasively argued that the patient lists are confidential trade secrets which cannot be used by the former associate to solicit the clients as patients. While the patient names, addresses and telephone numbers may be ascertainable in a telephone directory, the fact that those patients have chosen the particular dentist for specific treatment is not readily ascertainable, nor are the health histories of such patients, the present needs of such patients, or the amount and type of insurance coverage possessed by the patients. Applying the holding in Ingrassia, a court should have little trouble concluding that this is specific patient information which employees cannot learn on their own, and therefore, constitute protectable trade secrets. Therefore, we believe that such patients lists are protectable, and owners of practices should be able to prevent the theft of such information by their associates.

It is crucial that the employer have their associates sign a confidentiality agreement regarding trade secrets. In one case decided under a sister state's version of the Uniform Trade Secret Act, the court found that the potential buyer of a game manufacturing company was not bound by a confidentiality agreement since no express agreement had ever been entered into, although other issues existed which prevented the court from granting the summary judgment sought by the game company. Editions Play Bac, S.A. v. Western Publishing Co. (SD NY 1993 31 USPQ 2d 1338. In another case, a court considered it to be very significant that the owner of a trade secret failed to get a written confidentiality agreement, although the owner also alleged an oral agreement which meant there was a triable issue of fact to be determined at trial. Mayline Partners, L.P. v. Weyerhaeuser Co. (ND Cal 1994) 31 USPQ 2d 1051. In the two aforementioned cases, it is the author's belief that had the owners of the trade secrets entered into written confidentiality agreements, and provided they showed violations of the confidentiality agreements, the owners likely would have easily prevailed at summary judgment hearings in the early stages of the proceeding, thus saving the owners significant litigation costs. Therefore, it is essential that such agreements be properly drafted and be in writing.

Employment agreements should also contain enforcement mechanisms whereby the parties stipulate to filing for injunctive relief without proof of actual damages, so that a judge may issue a restraining order preventing patient solicitations of the owner's patients. Often such agreements contain liquidated damage clauses which act as a "disincentive" to the associate violating the owner's trade secret rights. The inclusion of such provisions will make it much easier for the owner to protect his patient base.

Summary

Covenants not to compete are a poor vehicle for use in seeking to prevent an associate from competing with the doctor following termination. While covenants not to compete are enforceable against sellers in the context of a practice sale to a new doctor, they are generally not enforceable as against associates with no true ownership interest in the practice. However, if a carefully drafted employment agreement containing trade secret provisions is entered into between the owner and the associate doctor, these lists should be protectable under applicable law.

We strongly urge our clients to have in place with their associates an appropriate employment agreement with trade secret provisions, in order to prevent the ambitious associate from converting the patient lists to the associate's own use.

You can find this article, and others by Jason and Patrick Wood on their website.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Why does becoming a dental associate have such a bad rap?

2010-08-16T16:43:00.001-04:00

Here is a guest blog post from Dental Tranistion Specialist Joe Spencer.

It all comes down to trust. New dentists often don’t have any idea how to find a practice to join. They call look over the classified ads and call on them, only to find that a great majority of them lead directly to brokers. The brokers, of course, are happy to have them call so they can talk with the senior dentists in their area hook the new dentist up with a senior dentist (and collect a 10% fee for doing the transition legwork).

Here’s that problem: If a broker is involved, the senior dentist is the one that pays the fee. The senior dentist is the one who has representation. The broker is working for the senior dentist. It is in the broker’s best interest to get the contract in place as quickly as possible so the upfront portion of 10% fee can be collected quickly. This may lead to a lack of full disclosure by the selling dentist’s broker.

Another reason is that having a middleman between the two prospective partners makes it difficult for the parties to grow trust. They don’t talk directly with each other from the start. The broker might say that the work of screening applicants is too much for most dentists to put up with. With innovation, they drag can be reduced, and the benefits of personal contact will outweigh the convenience of having a third person in the middle of the relationship.

See, associateships are a special kind of partnership. They should be a bit like a master Jedi teaching an eager young Skywalker. The master teaches the young Jedi the inner workings of the business side of dentistry. There is no more efficient way. Years of dental school teach the clinical side. The business side must be learns from journeyman.

The difficulty is when some senior dentists feel they want to offload all the drill and fill to the new dentist. The new dentist gets the low margin unexciting stuff. That is the way of an apprenticeship. The difficulty is that the relationship is not well defined. Expectations are not clear.

Building trust is the answer. Openness is the answer. Clear expectations put in writing are the answer. Build trust with your potential partner from the start… In a recent FastCompany article, scientists have proven that interaction through electronic means can build trust as if interacting in person. OnlyTheBestPractices facilitates building trust from the start, through openness and defining expectations. No matter if someone uses our tools or not, if clear expectations were well defined (in writing) through spirit of apprenticeship, associateships could once again be seen as a great option coming out of dental school.

The question is… are senior dentists willing to bring someone in for a period of time to teach them the best practices in running the business? Would senior dentists prefer to just practice up to a date certain and walk away? If that becomes the norm, owner-associateships will fade into history, and only employee-associateships will remain. At some point the word associateship will probably just fade out too.

This first appeared on OnlyTheBestPractices.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

New 1099 Proposal in Health Care Act Could Cause Additional Burden for Dentists

2010-08-09T10:55:00.001-04:00

Here is an article that one of our managers (Lance Jacob) wrote.

Small business may have extra tax reporting requirements starting in 2012 due to the passage of the Patient Protection and Affordable Care Act (Health Care Act) signed by the President on March 31, 2010.

In the past businesses have been required to prepare and file IRS Form 1099-MISC for each person they have paid at least $600 in rents and services (including parts and materials) to during the year.

Under the Health Care Act passed in March 2010, businesses that pay more than $600 during the year to non-tax-exempt corporate providers of property and services will have to file an information report with each provider and the IRS (for Payments made after December 31, 2011). In addition, businesses will have to file information returns for any person (and corporations) that receives $600 or more from the business for property and merchandise.

Basically, if a business pays any vendor (corporate or individual) for the purchase of property or merchandise totaling $600 or more, they are required to prepare an information return for that vendor. The information to be reported includes name, address, and federal identification number (or social security number) of the vendor.

Unless this portion of the Health Care Act is repealed, small businesses are looking at substantial costs (time in collecting information, costs for someone to prepare the returns, and handling any resulting correspondence from the IRS for missing information) related to the new reporting requirements.

On July 30 a bill to repeal this section (Sec. 9006) of the Health Care Act was taken up by the House of Representatives (H.R. 5982 the “Small Business Tax Relief Act of 2010”). Unfortunately the bill was defeated on the same day. So, at this point, the reporting requirements are still scheduled to go into effect as of January 1, 2012.

Lance Jacob, (800) 772-1065

Sources:

http://www.irs.gov/

Checkpoint RIA Research

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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When Should Dental Associate Set Purchase Price for Dental Practice?

2010-08-06T12:27:00.001-04:00

I've joined an established practice as an associate and we are discussing when to place a value on the practice. I was under the impression we'd take the value of practice now, but his attorney is suggesting December of 2011. We are both looking for what is fair and customary.

What are your thoughts? And what company would be a wise to use for structuring the purchase agreement?

Thanks!

It depends.

If the practice has had an associate prior to you joining and you're replacing that associate, have no problem with 12/11.

If you're the first associate in the practice I usually lean towards setting the price NOW.

If the attorney has a lot of dental experience, they can certainly initiate the structure of the purchase agreement.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Tax Planning for Dental Associate

2010-08-02T14:47:00.002-04:00

Hello,

I am a recent graduate starting 2 part-time associateships soon. One of them is paying me as an employee and the other one is paying me as an Independent Contractor.

Are there any ways to structure the IC contract to give me any advantages as far as tax savings?

Maybe. You can certainly structure the employment contract to save taxes, both income and payroll. I would rather get that under wraps first then move onto the IC contract.

Is it worth it to create an LLC / S-Corp to have the IC contract directly with the corporation so I can deduct my travel and auto expenses, professional liability insurance expenses, CE expenses and so forth...

I’m not sure I fully understand what you're asking. You need to make a lot of money (in excess of $200k gross) as an IC to warrant an S-Corp due to the costs to create and maintain. Generally an LLC or PLLC is all you need and report taxes as a sole prop.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Buying S-Corp Dental Office - How to Handle the Entity Questions

2010-07-12T14:13:00.002-04:00

I purchased an existing practice with an existing S-corp in place. I'm getting a lot of different messages from what to do as far as creating a new S-corp under me. I want to reuse the practice name. The person at the secretary of state's office said all I would need to do is change officer name to my name. Is that normally what you do? Or do I have to file a new entity, then have the old one dissolve somehow and then change my new entity name to the old one?

Thanks.

I'm surprised you didn't create your entity at LEAST 2-4 weeks prior to settlement. When you create this new entity, have you planned for the processing of notifying all the appropriate people? Landlord? Lender? Vendor? Insurance companies? Payroll service? etc., etc., etc.

Getting that DBA name sounds like the tip of the iceberg for you.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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When Should Dental Tax Planning be Done?

2010-07-08T11:28:00.002-04:00

I recently took up several part-time positions, with some paying me as an independent contractor. I think one of the positions is paying me as a W2. I may have an idea of how to file taxes using W2, but I am totally clueless about how to do it as an IC.

You better KNOW!

When exactly should I go to accountant to get my IC taxes done?

Done? Sometime between Jan-Mar of 2011.

To plan properly to get them done? NOW!

My yearly income taxes were done by a local accountant for $100/yr in a NYC area. How much more expensive will it be if I were to seek out accountant services for filing my IC taxes?

It depends on who's doing them and whether or not you want to PLAN NOW, AND get them done later. Just to get them done, maybe the person that did them for $100 will do them for $150. You have to ask.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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How Should the Purchase Price for Dental Practice be Allocated?

2010-07-01T16:22:00.002-04:00

Hi,

Is this a good allocation of $ for the buyer for tax advantage?

PURCHASE PRICE $475,000.00

Furniture and Equipment $ 110,000.00

Covenant Not to Compete $ 1,000.00

Patient Records $ 179,000.00

Goodwill $ 185,000.00

TOTAL $475,000.00

Tuscon Dr.

I would switch patient records and covenant not to compete. It has nothing to do with taxes. I just wouldn't feel comfortable in a transaction where the covenant not to compete is so low. What happens if it is violated? Is it worth more than $1,000 if you have to sue for it. Whereas, patient records are just paper and x-rays and pertain more to goodwill.

Try and keep the equipment allocation as high as possible for taxes, you should negotiate over this amount.

Tim Lott

I agree, though possibly for a different reason.

IF Nevada has a sales tax on furniture and equipment, they may also tax patient records. IF NV has an annual property tax on furniture and equipment, that could also be costly over the years. So please be careful to consider other taxes, and not just income tax.

Here in MD, with that allocation, the buyer would really be getting the short end of the stick when you consider ALL the tax issues, and not just income tax.

What has your tax advisor advised?

Jason Patrick Wood

As long as there is language stipulating that the allocations are for tax purposes and is not meant to be a damage award, etc. then the amount is irrelevant, however I like to have a slightly higher covenant just so it passes the IRS smell test and therefore usually use an arbitrary figure of $10,000. NV has a peculiar law on sales tax on equipment that has not truly been settled yet. Therefore, to avoid it I would recommend an allocation of a consulting agreement and a supply allocation.

Tim Lott

How about this allocation?

                                           Original                                         Suggested

Equipment and furnishings     $6,000                                         $50,000

Dental Supplies                    $1,000                                         $5,000 (including hand pieces, small tools)

Goodwill                              $20,000                                       $21,000 (including patient records)

Covenant Not to Compete   $46,883                                        $10,000

Leasehold Improvements     $16,117                                        $0

Patient Records                   $20,000

Consulting                                                                                $24,000

                                                            Total $110,000

Thanks Tim. Is consulting deductible? Why does it help the seller to minimize the equipment value?

Probably because their tax basis is zero so any allocation will be ordinary income.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Dental Hygienist Compensation Question

2010-06-22T10:19:00.003-04:00

I opened my practice in central Maryland 3 months ago. We have been growing like crazy. I am seeing about 6 or 7 new patients a day. The only problem with this is I have no time for dentistry, as all I do is new patient exams, prophies and scalings. We are booked out almost till the end of June (about 4 weeks). I am ready to hire a hygienist.

I put an ad on craigslist for a hygienist and received several applications. At first I wanted to hire an experienced hygienist, but ALL of the applications I received from experienced hygienists were clearly just looking for a higher paycheck, and not for a better workplace. I actually had one hygienist write in her cover letter, "I may not even want to work for you; I just want to see what my options are." I do not want to hire someone just in it for the money.

I also received several applications from very recent hygiene school graduates. They are enthusiastic and excited for the new opportunity. I decided I would interview the new grads and see what they were like. Obviously, they have no experience and are going to be slow at first, but I was impressed by their enthusiasm. I want to hire someone who can grow with the practice, and stay long term. I want to hire someone willing to work part time at first, and then, if they work out well, work full time.

My question is: how much should I offer to pay these new graduates? One asked for $34-38 per hour. That seemed on the high-end to me, but maybe I am not realistic. What types of salary are you paying your hygienists? What I was thinking about doing is paying them a lower rate for a 90 day trial period, and if they work out well, bumping up their salary and hours. What do you think of that type of setup? I am concerned about paying on production because we participate with several PPOs, and I do not want to lose money hiring a hygienist. Do you offer your hygienists benefits, like vacation/sick time, health-care or a retirement plan?

Thanks!

Paying $34-38 per hour is LOW from what I've seen here in MD over the past 5+ years. If you were to ask what you should expect to pay I would have replied $40-45 per hour. That's actually lower than what I would have replied with about 1-2 years ago.

...Last piece, the rule of thumb in terms of hygiene pay is that they should be compensated about 25%-30% of what they produce per hour.

…as a ratio this equates to the hygienist producing 3-4 times what they are paid. Here in this tri-state area (MD\DC\NOVA) while this ratio held true more than 7+ years ago, the ratio averages about 2.7 times what they're paid these days. This is because hygienist compensation has increased sharply over the last 5-7 years in this area.

Again, the 2.7 times their compensation for their production is an average. There are practices doing 3.5-4 times their compensation (not many though) just like there are practices doing 2-2.5 times their compensation.

So if you can get your statistics for their compensation in the range of 30-40% of their production, you're doing pretty well. Getting it below 30% and you're doing great...at least in this tri-state area.

Thanks for all of the advice! I interviewed a bunch of candidates and one candidate just seemed to gel with the office from the moment she walked in. Her references spoke extremely highly of her. We just called and offered her the job and she was ecstatic. She is going to work 2 days a week until we are busy enough to have her work more, and then I'll have her work 4 or 5 days a week. I am excited and hope she works out well.

The anticipation is killing me, were the ranges of compensation close?

I am paying her $34 an hour. I am buying her an LED light for her loupes, which I guess you could call a benefit. There are no other benefits other than that, although I guess working with me in my awesome practice, with my great equipment and staff is a benefit. In a year or so, when I set up a retirement plan for myself, I will get something that I can offer to all my employees. She said she did not want health insurance, due to her spouse having it, so we are good on that. I didn't mention it to her, but I am a strong proponent of CE, and will probably take my entire staff to things now and then so that is a benefit as well.

Thanks for the feedback, very helpful. You did VERY well!

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Acquiring a Dental Practice and Merging it into an Existing Practice

2010-06-11T09:54:00.002-04:00

I have an opportunity to purchase an existing dental office that is 3 miles away. The doctor is in her 60's and is willing to sell and work in my office 2 days a week. Time frame for her to exit the office will have to be evaluated. It is a FFS office with no PPO, similar to mine with an exception that I am a provider to Delta Premier and United Concordia. She is willing to share her numbers before meeting with the broker to see if it is feasible for us to pursue. Any advice what to ask and look for?

You should have her run reports of patients that have those providers to see if any of them will be able to use them in your office. Then get a breakdown of production by provider to see how much additional hygiene hours you'll need. Once you do that, get a list of her employees and their hourly rates and find out what benefits she may pay to compare with yours. You'll also have to compare vacation days given, etc, and compare with yours. If you hire any of her employees, the compensation packages, benefits and PTO days will have to match. You will need to evaluate the fee schedules and find out if you do any procedures she doesn't and vice versa.

These are just a few things off the top of my head.

Thanks Tim for your responses. She wants to practice with us 2 days a week. Will the purchase price be lower or higher than a typical practice acquisition without the dr staying on?

The price should be less than the typical acquisition where you're also buying tangible assets and the space.

I can't say I've noticed differences in prices with or without the doctor staying. That's up to the parties and I just haven't seen it used as a negotiation point in the majority of the deals I'm involved with.

All that said, you certainly stand to retain much more of the patients with the seller staying on board and assisting with her GW transfer as opposed to having her out immediately.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Capital Versus Debt – What is the Difference?

2010-06-09T11:32:00.001-04:00

Here is an interesting article by Richard Sinclair, a friend of our firm.

In the entrepreneurial world of small business, capital, business risk and credit risk can all be easily misunderstood.

One of the reasons companies succeed or fail is due to capital, also known as equity. Whether a business is funded by its owner(s), angel investors or bankers, business risk and credit risk are very different and must be understood to obtain funding.

What Is Business Risk?

According to Jim Hogan, of J. L. Hogan & Associates LLC, a commercial lender with 30 years' experience, business risk is market risk. When a banker considers a loan, a stream of income or revenue is needed to repay the loan. Since cash flow services the debt, a conventional commercial loan is not usually the best avenue for new or young entrepreneurs because their business model is not proven to be viable.

Understanding capital versus debt will take a new business owner far in his goal to success.

For instance, a national company recently sold its local small candy manufacturing division. The buyer was an individual from outside the company. She desired the platform because, in the future, she wanted to convert the candy company into a specialty pharmaceutical manufacturer, an area where she had some experience.

The buyer capitalized the candy company with cash from her retirement fund and money from friends and family. The deal got sweeter because of a seller "take-back note" on machinery and equipment and a rent moratorium for 90 days from the landlord. In addition, some customer accounts were retained, and therefore, the company generated modest revenue from the beginning.

Yet the monthly cash generated was not sufficient to cover the operating costs of the business. As such, the company would have been out of cash in seven months. The company moved quickly to build additional sales, collect on those sales it made and reduce its shortfall. Within months, the shortfall had dropped and the company had sufficient remaining capital (equity) to continue for more than 20 months. But the goal was to become profitable, not just stay afloat. With a few additional sales, the candy company's positive cash flow was within its grasp.

What Is Credit Risk?

Tim Lewis of Chesapeake Corporate Advisors says credit risk is a funding risk that lenders take, intended to cover a timing difference in a business's operating cycle, such as when a company makes a sale and is waiting for payment while it simultaneously has to pay operating expenses.

Credit risk is the timing risk of business assets converting to cash - for instance, accounts receivable. Credit risk should not be the risk of business failure, and credit risk is not rewarded like business risk. Credit risk is rewarded with a reasonable return, but never a large payout to the lender.

A lender will loan on a credit risk, for example, when it knows it has a receivable. The lender then becomes the entity that funds timing differences between the sale of the product and the collection of cash. It might be an inventory conversion cycle in which there is a conversion to a sold product for cash or generating accounts receivable. The business will use all its assets as collateral for funding, and for small businesses, the business owner will also provide a personal guarantee.

The most important thing to remember about credit risk is that capital needs to precede debt. Let's say a local entrepreneur wanted funding for the development, manufacturing and sales of his unique gloves and heated bike riding apparel. He has had some success in the regional biking market, based on his own minor investment, but showed no retained earnings. He wanted to grow his company, and while the finance community could see his business potential, the risk at this early stage was of the business succeeding (business risk), not the risk of the conversion cycle. As such, he was dissatisfied with lenders that were unwilling to finance his marketing efforts to grow his business.

What's the Difference?

Why was the candy manufacturer successful in finding a line of credit while the glove and apparel manufacturer was not successful in finding a loan? The answer again is capital.

In the candy manufacturing deal, the entrepreneur takes the business risk through cashing in her retirement and the investment of her friends and family. She also had cash equity in the game, taking the risk of business success or failure. If the business fails, the entrepreneur, friends and family lose. They may lose all of their investment. But, if the candy company is highly successful, the investors can win many times their original investment. The lender knows that the equity is there and at risk before the loan. The lender takes a credit risk, not a business risk.

The biking entrepreneur failed the business risk test because the lender was being asked to take the equity risk of a successful marketing campaign funded by the lender, not the credit risk of the asset conversion cycle.

Why Does It Matter?

"Business risk underlies credit risk," quips Lewis. "When a business owner embarks on a new venture, he or she is assuming whether or not the business will succeed or fail."

The responsible business owner needs to identify funding sources, and he needs to take his product or service from the concept phase to something that is generating value and profit.

That is when a lender can come in to play. A traditional banker does not take business risk, but does take credit risk. The lender will be there to finance the asset conversion cycle, but not to take an equity level risk or get an equity level return.

Equity should be there to protect the debt and help the business grow. The successful entrepreneur may want to sell his or her business in the future, hopefully for many times his or her equity investment.

Before entrepreneurs go to the bank for a business loan, they should ask themselves, "What kind of risk is this, business (equity) or credit (moving business assets through the conversion cycle)?" The answer is their guide.

Richard Sinclair is president of Correspondent Business Credit, a company meeting the alternative financing needs of small businesses in the Chesapeake region through asset based lending. He can be reached at 888-849-4222, ext. 19.

This first appeared in The Business Monthly

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com