Wednesday, March 24, 2010

Should Dentist Remain an S-Corp or Convert to Sole Proprietor?

Currently I am the only employee of my own S-Corp.

The only advantage I see being in a S-Corp is the limited liability? Is that right?

I'm considering dissolving the S-Corp and go back to the sole proprietor 1099? I'm paying my accountant about $2000 a year just to file the quarterly tax, monthly IRS tax, and the yearly corporation’s income tax.

I honestly do not know if I'm really benefiting from the s-corp. I work as an independent contractor to an office last year and the most write-offs for my personal equipment purchase, supply, etc was probably less than $5000 total.

This year I changed jobs and I'm probably going to end up only bringing home less than 60k before tax. If I can cut back on paying (the CPA) to maintain the corporation, is that better?

Purely from an INCOME tax perspective, generally there's no difference between an S-Corp and a sole proprietor when it comes to business deductible expenses. An S-Corp can save you some Medicare tax; however, in my opinion, you have to NET at least $150,000 with an S-Corp for the Medicare tax savings to offset the additional costs of having an S-Corp. Therefore, purely from a tax savings perspective, an S-Corp would only make sense once you begin to NET more than $150,000.....again, in my opinion.

There was a time where corporations in general were less likely to be audited by the IRS and while that stat may still hold true, S-corps have been targeted more recently for reasonable compensation. Because of that, I've stopped using that as a reason to incorporate.

If it's legal liability you are concerned about, see what our friend Jason Wood has to say below. In many other states, working as an LLC would accomplish that; however, I understand CA hasn't caught up with the rest of the country on allowing LLC's as a legal entity.

Jason Patrick Wood (Dental Attorney):


You are correct. CA will not allow dentists to be LLC's. Unfortunately, many dentists in CA actually ARE in LLC's. It is shocking.

I agree with Tim however, that based upon what you have told us, there is no real benefit to have an S-Corp in your current situation.

Even if your thought was to keep the corporation so that when you purchase a practice you will already have one, this isn't a good rationale. Reason: I would not counsel you to continue using the corporation you currently have, because I don't want you transferring any existing liabilities of your associateship into your new practice.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at

For more information or to sign up for our newsletter, please contact
Follow us on TwitterFacebook and Pinterest

Friday, March 19, 2010

How are Dental Receiveables Treated When Transferred into an S-Corp?

I formed a S-corp this year after being a sole proprietor. I understand that the lower of fixed asset adjusted basis or FMV would be counted as owner's contributed capital into the new S-corp - thus no capital gain/loss.

What about the sole proprietor's receivables as of the date of transfer into S-Corp? Would that be considered capital gain as if I sold the AR to the S-Corp? Or, if I have $100k of receivables at the time of transfer, I would increase my owner's basis in the S-Corp by $100k.


KISS (Keep it Simple), there should be no tax consequence when you incorporate. Simply begin using the corporation by making deposits and paying bills as soon as you open the bank account. The F&E are transferred at book value, no FMV adj is necessary. Generally continue with your regular depreciation schedule as though nothing happened.

There may be some one-time tax planning opportunities involved so please talk to your CPA. Here's some information from IRS government: (The link )

Property Exchanged for Stock

If you transfer property (or money and property) to a corporation in exchange for stock in that corporation (other than nonqualified preferred stock, described later), and immediately afterward you are in control of the corporation, the exchange is usually not taxable. This rule applies both to individuals and to groups who transfer property to a corporation. It also applies whether the corporation is being formed or is already operating. It does not apply in the following situations.

• The corporation is an investment company.

• You transfer the property in a bankruptcy or similar proceeding in exchange for stock used to pay creditors.

• The stock is received in exchange for the corporation's debt (other than a security) or for interest on the corporation's debt (including a security) that accrued while you held the debt.

Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax returns a complete statement of all facts pertinent to the exchange. For more information, see section 1.351-3 of the Regulations.

Control of a corporation. To be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock.

Property of relatively small value. The term property does not include property of a relatively small value when it is compared to the value of stock and securities already owned or to be received for services by the transferor if the main purpose of the transfer is to qualify for the nonrecognition of gain or loss by other transferors.

Property transferred will not be considered to be of relatively small value if its fair market value is at least 10% of the fair market value of the stock and securities already owned or to be received for services by the transferor.

Liabilities. If the corporation assumes your liabilities, the exchange generally is not treated as if you received money or other property. There are two exceptions to this treatment.

• If the liabilities the corporation assumes are more than your adjusted basis in the property you transfer, gain is recognized up to the difference. However, if the liabilities assumed give rise to a deduction when paid, such as a trade account payable or interest, no gain is recognized.

• If there is no good business reason for the corporation to assume your liabilities, or if your main purpose in the exchange is to avoid federal income tax, the assumption is treated as if you received money in the amount of the liabilities.

For more information on the assumption of liabilities, see section 357(d) of the Internal Revenue Code.

Basis of stock or other property received. The basis of the stock you receive is generally the adjusted basis of the property you transfer. Increase this amount by any amount treated as a dividend, plus any gain recognized on the exchange. Decrease this amount by any cash you received, the fair market value of any other property you received, and any loss recognized on the exchange. Also decrease this amount by the amount of any liability the corporation or another party to the exchange assumed from you, unless payment of the liability gives rise to a deduction when paid.

Further decreases may be required when the corporation or another party to the exchange assumes from you a liability that gives rise to a deduction when paid after October 18, 1999, if the basis of the stock would otherwise be higher than its fair market value on the date of the exchange. This rule does not apply if the entity assuming the liability acquired either substantially all of the assets or the trade or business with which the liability is associated.

The basis of any other property you receive is its fair market value on the date of the trade.

Basis of property transferred. A corporation that receives property from you in exchange for its stock generally has the same basis you had in the property, increased by any gain you recognized on the exchange. However, the increase for the gain recognized may be limited. For more information, see section 362 of the Internal Revenue Code.

Election to reduce basis. In a section 351 transaction, if the adjusted basis of the property transferred exceeds the property's fair market value, the transferor and transferee may make an irrevocable election to treat the basis of the stock received by the transferor as having a basis equal to the fair market value of the property transferred. The transferor and transferee must make this election by attaching a statement to their tax returns filed by the due date (including extensions) for the tax year in which the transaction occurred. For more information on making this election see section 362(e)(2)(C) of the Internal Revenue Code, and Notice 2005-70, 2005-41 I.R.B. 694.

A CPA is telling me that the AR I transferred from Schedule C to S-Corp will be treated as schedule C income for 2009 and the AP I transferred from Sch. C to S-Corp will be treated as expenses for Schedule C in 2009 since I earned the income and incurred the expense as schedule C sole proprietor:

So, he said the entry should be:

DR. Old Receivables transferred from being a sole proprietor

CR. Owner’s Equity

But, when I received payment against the old Schedule C-AR, S Corp journal entry would be:

DR. Cash

CR. Old Receivables transferred from being a sole proprietor

Schedule C entry will be:

DR. ??

You mean the CPA didn't know what category to use? That might give you a clue.

CR. Income

These are typical accrual basis entries. Are you cash basis as a sole proprietor? Your s-corp should be cash basis as well. No such entry is needed, assuming you'll remain cash basis.

Does the above entry make sense? Would S-Corp need to pay Schedule C sole proprietor for all the collected AR from Schedule C.

If I were a cash-basis sole proprietor, why would I consider the transferred AR as income in Schedule C.

You wouldn't. However, you can if that's where you deposit it. Look, if you've been reporting and paying tax on production and not collections, then those entries make sense.

Can you point me to some IRS publication so I can study this further? Thank you.

You mean besides what I provided above? This issue doesn't require all this time and energy. We've done this hundreds, if not thousands of times, with MANY of our clients that have incorporated over 30+years.

1. Create s-corp.

2. Open checking account.

3. Make deposits.

It's pretty much that easy. Someone is really making a mountain out of a pimple on this one.

If you feel that strongly about following your CPA's advice, don't transfer the a/r or the a/p. Allow them to flow through your old Schedule c and just deposit collections from new production into the s-corp. There is no need for JE's.

…or, hire us and pay for our advice which we'll back up if it's incorrect.

Tim, thank you for your explanation. This is where I'm getting confused. Since I was a Schedule-C cash basis taxpayer, if I book the following entry when I transferred the AR to S-Corp

Opening Entry:

Dr. AR

CR. Owner Equity

In S-Corp, since I'm also cash-basis, every time I collected cash against the old receivables, I would

DR. Cash


None of these entries are necessary. Since you're cash basis in both entities, when you deposit cash from patients, you have income. If it's entries you need, they would be the same in both:

Dr. cash

Cr. income

There are no other entries needed in my opinion.

But, where do I pay "tax" on that income?

Cash basis-where ever you deposit it.

(Since I was a Schedule C - cash basis, so I have not reported that AR income under Schedule C, and under S-Corp, since AR was part of contributed capital, there's also no income statement impact ever time I collected against the old AR under S-Corp).

Why "contribute" A/R? Why not simply assign the collections to the s-corp when you receive it? Again, you're a cash basis taxpayer.

Maybe I'm missing something, but under which entity should these cash collected on these AR be taxed since both S-corp and sole proprietor are cash basis. Thanks.

I think you're meshing the GAAP treatment and the tax treatment and it's confusing the heck out of you. For GAAP (generally accepted accounting principles) your debits and credits are probably accurate. For tax, they don't belong. When you are a cash basis taxpayer, you report taxable income (not GAAP income) when you receive it, NOT earn it (like GAAP).

As I said above, other than the "entries" you need to make for the other assets like F&E, with income:

1. Create s-corp

2. Open checking account

3. Make deposits

That's all there is to it.

I don't understand why you're trying to put A/R on your s-corp balance sheet if you're cash basis. You can do that if you like for GAAP, just don't confuse it with tax reporting.

By the way, the details of the make-up of the A/R is irrelevant to your main question of where to report the income as are the questions about your new TIN and that process…unless you had questions about them that I missed.

PainlessPaulus (Doug) chimes in:


I have a question. What if he reports the insurance checks as income on his SS rather than the TIN... then transfer it to the K-1 and 1120s.... This would save alot of FD work.. I believe Carl said that on an asset sale to a new LLC the income can be report on the old TIN... This is a BIG PITA that other businesses don't have....


This is a common issue and can be resolved very easily when doing tax reporting. I just did a return for an orthodontist who works in other GD offices. The offices receive the income and pay the orthodontist his percentage on a 1099. Well someone in one of the offices used the orthodontist’s social security number to file the claims instead of the GD's TIN. We simply show the income incorrectly reported, take a deduction for the exact same amount, and label it something like "income reported incorrectly" or "income reported under TIN 12-345678".

PainlessPaulus (Doug):

So... could you do this year after year?

If it continues to be reported wrong, why not just fix the problem?

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at

For more information or to sign up for our newsletter, please contact
Follow us on TwitterFacebook and Pinterest

Monday, March 15, 2010

401(k) Plan - Is it a Good Deal for Dental Office?

I'd like to be able to save a lot each year on a pre-tax basis, but the plan I'm looking at right now doesn't seem like a very good deal. Can you guys tell me what you think about this?

In order for me to contribute the maximum $49,000, these will be my costs:

  • Employee safe harbor match: $4,400
  • Employee profit sharing: $13,475
  • 3rd party administration fees: $2,000
  • Plus 1% of assets commission
So, I'm looking at annual costs of close to 20k. The tax deferral may be close to that amount, but the taxes will have to be paid eventually when the money is withdrawn.

It seems to me that this plan would be fairly revenue neutral for me. The main benefactors would be my employees, but they are already compensated well.

The other option I'm considering is a SIMPLE IRA. I can put in $11,500 and then a 3% match which would bring the total to close to 20k. My employee costs would only be around 4k IF I'm matching them all at 3%. With this option I would save less on a pre-tax basis, but I could still save just as much each year. The remaining money would just have to be saved post-tax.

Any thoughts?

I listed some of my thoughts below. Overall, I think at this point going with the SIMPLE IRA seems to make the most sense, and then I will need to invest the difference in a post-tax account. Do you disagree?

I’d forget the 1% commission in the equation. It seems to me no matter which investment you choose, someone or some company is getting paid the commission and\or management fees.

With a SIMPLE IRA, I could set it up through Vanguard and pay much lower fees. Certainly much less than 1% of assets and I'm comfortable enough with investing that I don't really need someone to hold my hand too much.

The $2k admin fee is reasonable is it's in the $1,500-$3,000 range I typically see.

On the rest you should break it down for analysis in my opinion:

1. For you to max the deferral of $16,500 you say the ee match is $4,400 and I assume that doesn't include your match as that equates to approximately $150k in wages which doesn't include you. I'll guess that your match is approximately $7,500 as well. Therefore, for you to defer $24k, the cost is $6,400. That's approximately 80% going to you, which is a decent result. It could be even better if you consider the "match" as part of their compensation when determining raises, etc. If you do, then theoretically the $4,400 isn't an additional cost. It's part of their compensation.

It is part of their comp, but I don't intend to give them a raise of that magnitude any time soon. They are already well compensated and I do not need to provide this in order to retain them or keep them happy. I couldn't reduce their current pay in substitute for this extra 401k payment, so overall it would be an extra staff expense especially when you consider the extra 13k profit sharing component.

2. To get an extra 25k, the employees will get $13k. Again, that's about 70% going to you and that's on the borderline of being acceptable; however, if you could factor in a portion of the $13k as part of their overall comp\bonuses, etc., then the entire $13k may not be considered an additional cost. The $13k is MUCH harder to handle as part of their comp compared to the $4,400. So the additional PS contribution is much less attractive.

Good point. The profit share component is very costly on the employee side.

So the simple gets you about $5k less in a deferral; however, you save $2k in 401k/ PS fees which is probably the tax deferral. If there are other benefits to the 401k/ PS plan, like the ability to borrow, it may be worth spending the $2k in administration fees.

I don't really see myself borrowing from the 401k. You never know, but if I just saved that 2k each year that adds up over time.

Does your spouse work in the practice and if so, could she defer? If so, the 401k/ PS deferral between the 2 of you could be at least $10k, but probably more since she'll also receive a match.

No, my wife doesn't work in the practice. And she already works 60 hours a week elsewhere, so it's not a good option to have her do any admin work so that I can put her on the payroll.

The last question I have is whether or not this is just a plain vanilla 401k\PS plan proposal OR has a pension admin firm reviewed the total team demographics to see if there's a way to design the plan to minimize the EE cost even further?

A pension firm uses an employee census to give me the estimate. They said that because I'm 31 and my employees are 30, 38 and 56 that the rules do not work very well in my favor in terms of lowering employee contributions.

Tim, what do you think about my PEO, Odyssey Once Source, and it's non-qualified deferred compensation plans that allow me to make my own decision on how much to put away and a non-match 401(k) plan for my employees?

So far, I love it!

LOL..., I have NO idea as I’ve not seen your PEO plan and how it operates and what your flexibilities\restraints are. If you have a link with specific information, I can take a peek at it in January.

I do recall checking out an odyssey link  & it certainly seemed interesting. I’d love to know all the details though: what they offer and what the associated costs are. I don't recall seeing cost information on that link. Maybe I didn't spend enough time cruising it.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at

For more information or to sign up for our newsletter, please contact
Follow us on TwitterFacebook and Pinterest

Monday, March 8, 2010

Are Dental Lab Fees Deducible?

I'm an associate at an office. I get 40% of collection after lab fees. Can I deduct those lab fees on my tax return? The lab fees never really officially show up on my pay. What do you think?

First, don't assume the owner is deducting the lab expense BEFORE calculating taxes. I have seen situations where the lab was deducted AFTER taxes were calculated, and if that's the case, YES, you can deduct them. However, if that is not the case, you're better off asking the owner to revise his calculations and revise your W-2.
Second, of course the owner is paying 100% of the lab. Then he's withholding 40% of that lab from your check. So in reality, he is now offsetting that expense for 40% of the lab. At the end of the day, he's only deducting 60%.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at

For more information or to sign up for our newsletter, please contact
Follow us on TwitterFacebook and Pinterest

Wednesday, March 3, 2010

Tax Deduction for Donated Dental Equipment and Clothing/Uniforms

I’m considering donating a Biolase Waterlase laser to my old dental school. I spoke to my accountant and he said that since my S-Corp already took a deduction on the purchase and the equipment is fully depreciated I cannot deduct the donation off my Corp return. If I take the laser out of the S-Corp, I would have to pay tax on the current value of the laser before I could donate it. Is there any way around this? It seems I am between a rock and a hard place in trying to donate a piece of equipment I rarely use and get a deduction on it. Thanks.

The accountant is correct. Think about it: do you think you should be able to deduct MORE than the cost of the equipment? Or, how many times should you be able to deduct the cost of a piece of equipment?

I know my accountant is correct. It’s just funny because I hear on occasion that people donate unused equipment and take a deduction they probably are not entitled to.

No doubt this happens. I just reviewed a 2008 return for a dentist where they took a deduction for "business attire" for approximately $2,300. I figured uniforms\scrubs\dry cleaning; however, I hate to assume, so I asked. It seems as though he was told he could write off most of his clothes he wears to work...

...and to think I’ve been missing out on that deduction for 26 years now

...I wear dress shirts etc. I asked my tax guy if I could deduct that and he says that I can.

Dress shirts are not "uniforms". If you read the code it says that if the clothing is "adaptable" to street use they are not deductible.

For example, the overalls an auto mechanic might wear that have the company name and the mechanic’s name on it would almost certainly be deductible as these are not the type of clothes they would go out on a Friday night wearing. Whereas your dress shirt is likely something you can wear out on a Friday night and therefore not deductible.

I’m certain you aren't the only one deducting dress shirts. That doesn't make it deductible though. I wonder if your tax guy deducts the clothes they wear to work.

I buy clothes maybe a couple times a year. Now if you really liked clothes (e.g. a woman who buys shoes and clothes all the time), then I’m sure that would be a different story.

Nope, it doesn't make a bit of difference. Whether you buy $50 of dress shirts or $5,000 of dresses and shoes, if they are adaptable to street use the code says they are not deductible. They don't assign a dollar figure to the deduction.

In the end though you should do what you're comfortable with and trust your "tax guys’" advice.

What if he wears those clothes to work as uniform? Is he still entitled for the deduction?

If they are indeed "uniforms", yes.

Clothes you can buy at Macys without practice name\logo are not considered "uniforms".

Interesting Tim. I give all my staff $150 for uniform allowance once a year, including the front office staff. I would send them the store and reimburse them with a receipt. These are clothes that they may have bought a Macy. I want the front desk to look nice because they are a reflection of the practice. Will these clothing be deductible?

As long as you slap your practice name and logo on them and call it a uniform....otherwise wouldn't we all LOVE to deduct our business clothing...suits, dress shoes, belts, etc?

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at

For more information or to sign up for our newsletter, please contact
Follow us on TwitterFacebook and Pinterest