Thursday, May 31, 2012

Exit Interviews Are Crucial for Departing Employees

Here is another guest blog from our friends at Bowie and Jensen Law Firm.
Handling employee departures like a pro takes practice, but the difference to your company can be significant.
Each employee departure is unique and provides an opportunity to learn about your organization’s strengths and weakness. This is especially true in the case of resignations.
As such, requiring all departing employees participate in an exit interview is a good investment of time. During an exit interview, an employee can be questioned about the reasons for the departure, including problems in the workplace such as lack of innovation, poor opportunity for advancement as well as perceived discrimination, harassment, bullying or other inappropriate conduct.
Collecting this information allows an employer to assess the risk of potential employment litigation involving the departing employee and others. If an employer learns that a departing employee is considering filing a legal complaint, the employer should address the employee's concerns immediately, to the extent possible. Prompt action may help avoid litigation or help protect against liability if a complaint is filed.
Exit interviews are also an excellent time to remind employees of any post-employment covenant obligations such as confidentiality, non-competition, non-solicitation of customers and no raiding of company employees. These interviews also provide an opportunity to discover risks relating to confidential and trade secret information. This can be done by asking about the employee's future plans. If the employee is joining a competitor, an assessment can be made about the likelihood the employee will violate any applicable non-compete or non-solicitation agreements, or misappropriate confidential and trade secret information.
Based on the information collected (and taking into consideration the company’s treatment past employees) consider whether a severance agreement and release is appropriate. Employers buy a measure of certainty when they secure a full release in exchange for the payment of severance or other benefits to which an employee is not otherwise entitled. While employees cannot release their right to file an Equal Employment Opportunity Commission complaint, they can release their right to any individualized relief. This means, among other things, they cannot seek money damages for any released claim. Releases generally cover anything relating to the employee’s employment or termination from employment.
Finally, exit interviews provide an opportunity to manage the employee's expectations. A smooth transition is more likely when employees have basic information such as the date to expect a final paycheck, and the status of any bonus, commission or incentive pay. Employers should also notify employees as to any payment for accrued and unused paid time off. Finally employers should notify employees when their benefits coverage will terminate and whether they are eligible for COBRA and when to expect to receive a COBRA notice. 
For more information please contact Nicole Windsor at 410-583-2400.

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Monday, May 28, 2012

Neither Dentist or Landlord can 'Double Dip' on Tenant Improvement Deduction

I am in the process of a start up and have made arrangements to have a cost segregation study done so I can take accelerated depreciation on my taxes within the first 5-10 years.

I have agreed to pay extra on my rent in exchange for increase TI's with the understanding that I will then be adding this to my cost segregation for accelerated depreciation. Now the landlord is going back on agreeing to the above saying that HE wants to take the accelerated depreciation.

My question is: If the landlord is recouping his TI by an increase in my rent in the first 10 yrs, can he then 'double dip' so to speak and claim that in accelerated depreciation form as well? (I think he called it bonus accelerated depreciation)

Based on how you've described the situation, yes, the landlord owns the TI, and is receiving additional rental income for them so they can take depreciation on them.

Either way, you're paying for the TI and you've chosen to pay for them as rent and you're deducting rent as you pay it. So YOU can't double dip and also show them as an asset and take depreciation.

Now, if what you're saying is the additional payment on top of rent is a loan payment where you're paying P&I to the landlord for lending you the money to "own" the TIs, then you can depreciate them.

What approach did your CPA was better for you in your particular case?

Thank you for your reply. Yes the agreement is essentially me 'owning' the TI's: I would not be expensing the additional amount above base rent that I have agreed to in exchange for TI's, it is interesting that CPAs seem to be divided on this issue, my CPA is essentially in the camp of 'landlord cannot double dip' but a couple other I have consulted with think that it is landlord's TI regardless, of course including the landlord's CPA. 

For now it seems like the landlord is backing down and agreeing to what he had originally agreed: allowing me to take the accelerated depreciation. We'll see if he actually signs off on it in the actual lease.

Clearly no one can double dip – every CPA will agree to that. That's not really the issue though. The issue is how this part of your lease is negotiated and ultimately worded/structured.

Good luck

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Tuesday, May 22, 2012

How Can a Dentist Minimize Taxes When Purchasing a Building?

I have had a dental practice (LLC) for the past 10 yrs. This year, I have purchased an office condo to move into in the next year or so. The office condo is owned by a different entity (LLC). Is there a way to deduct all (or part of) the expenses such as the cost of the new condo, monthly condo fees, as well as the expenses for the construction?

Currently, the new LLC that owns the office condo does not have any income, but all the expenses. So far I have been paying those expenses from my salary (out  of pocket),  but I would like to see if I can make my dental LLC, or another entity arrangement to take up the expenses (pre-tax) to reduce my overall tax burden?

Please advise. I greatly appreciate it.

If both LLCs are disregarded entities then it's actually fairly simple; just have the practice pay ALL of the expenses of the condo.

From your practice you'll depreciate the condo over 39 years. You may have to allocate a portion of the cost to land which is not depreciable, but you can deduct the annual operating expenses like condo fees, utilities, insurance, real estate taxes, etc., and the mortgage interest expense.

Generally, loan costs can usually be amortized over the life of the loan.

Now if the practice is being taxed as a corporation, that changes a few things.

Talk to your CPA, they should be able to square you away.

I deeply appreciate your response.  I don't know why my accountant did not tell me these things.
I was just talking to a friend of mine over the phone and she told me her dental business is an LLC but her accountant files her taxes as S corp.  She did not have to pay a lot of self employment taxes.  My accountant used Schedule C for me for year 2011 and I paid $15,000 of self employment taxes.  Would I save money on taxes if I request my accountant to file my taxes as S-Corp?
You might save money. There are benefits and costs to electing to be taxed as an S-Corp so you'd have to run the numbers to make the call.

My accountant also said the only way I can deduct the new office condo expenses is to form a third company that is on top of the two LLCs and this way they are connected and I can carry the cost from one to the other. Please advise me on this.
Sorry, I'm at a loss as to why you would need to do that.

I forgot to ask what do you mean when you say "if two entities are disregarded"?  Do you mean if they are separate and independent? 

No, a single member LLC that does not elect to be taxed as a corporation is treated as a "disregarded entity" from the IRS's perspective. This means that you're simply a sole proprietor for income tax reporting purposes.

I am planning to change my CPA.  How important is it to get a "DentalCPA"?  Of course you guys are both Dental CPAs, and perhaps you would encourage a Dental CPA, but is it very critical to have a Dental CPA?
There are a number of posts this year that go into the benefits of using a dental CPA and you can also read Dr. Howard Farran’s April 2012 monthlyarticle on the advantages of using a Dental CPA.

I just received my bill from my CPA and I had a mini heart attack.  He had charged me $2700.00 just to file end of the year taxes for a disregarded LLC.  Would be paying more if I use a dental CPA?
Without knowing exactly what the bill was for (i.e., specific services covered) I can't comment on the $2,700 or if our fee would be more or less.

Is it OK to discuss a CPA fees before making a commitment?
Do your patients want to know what the fees will be for certain procedures you’re advising? The clear answer is absolutely!

This first appeared on Dentaltown.

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Tuesday, May 15, 2012

Dental Practice Purchase Should Be Viewed through a Start-Up Lens

I was interviewing with a dentist for an associate position which was advertised for an associate to become a partner later on. After talking, it seems the dentist actually wants to get rid of the practice as he owns another much nicer practice which is doing very well and has lot of other businesses to take care of. He bought this practice from the bank as it was a foreclosed and then redid the entire practice, put in nice Sirona chairs, has 3 fully equipped operatories and another room which is plumbed for 2 more. I think the entire area is 1700-1800 sq ft. Has a pano and all digital x-rays and digital charting. He said that initially he was looking for someone to just work for the practice but now he doesn't have time for it and possibly wants to sell it off for 150K.

Its right at an intersection and the visibility is good, BUT there's a nice implant and general practice right next door which seems to be doing very well. 

The practice is in nice area of town. The median income of people is around 160K in that area. I have no idea how many other dentists are there within 1 or 2 mile radius. Most likely a lot!!

I want to know how can I find the true worth of this practice? Who should I be talking to?And what are other things I should be asking the owner?Please guide me a bit! 

The price of $150K has been quoted by the seller's realtor. Should I be asking for the existing lease copies? Can the seller's realtor give me info about demographics?

What you have here is a start-up situation with a small patient base, so you should approach it that way.

1. Is this an area you want to own a practice in?
2. What are the demographics?
3. What would it cost you to re-produce the same facility?
4. How long will it take you to re-create the space?
5. How many days is it open now? Will you increase the number of days?
6. What are the lease terms?

Depending on the demographics the practice right next door might not even matter. You said it was a nice location.

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Friday, May 11, 2012

What Meals and Entertainment Deductions Can a Dentist Take?

I've read that this category (meals and entertainment deductions) is highly scrutinized by the IRS, so I want to get it right. There are two types of meals and entertainment deductions: 50% and 100%.

I have a monthly meeting with my whole staff at a restaurant: 100%
I have a monthly meeting with my whole staff at the office, delivered meal: 100%
I go to my monthly dental society dinner meeting: 100%.

Q.1: I meet my dental, medical friends out at a restaurant/bar, have drinks and eats to discuss our various taxations, and buy some food and drink. The entire encounter is documented as a professional meeting: 50% or 100%???

Q.2: My wife is my designated "office manager," and legitimately handles the ordering of supplies, the paying of the bills, the order and cleanliness of the office, as well as the payroll and certainly future planning. When I go out to dinner with her, we always talk business. If I keep the record of the meeting, (a) how often can we reasonably go out to discuss these issues and have a deduction, and (b) are these 100% meals and entertainment deductions, or 50%? Is there a specific trigger of either documentation or inclusion of all employees?


Here's how I've always discussed it with my dental clients as the way to deciding. It is not stated like this in the code, just a common sense way think about it:

When the meal is incidental to the meeting, the meal is a meeting expense and 100% deductible.

If the meeting is incidental to the meal, it's meals and entertainment, 50% deductible. So you plan on having "dinner" with colleagues and you happen to discuss business, that's a meal. Maybe it's not even deductible?

Another way to think about "dinners":

Everyone has to eat, personal meals are not deductible. If you decide to go out to dinner with your wife, whether she's an employee or not, it's a meal, NOT a meeting. Now, that meal MIGHT be a business meal if you also "intend" to discuss business, that's up to you. Make sure you document the topics and even include any follow-up actions required. For example, if you discussed an employee’s job performance, make sure one of you has a meeting with that employee within a couple of days to go over the issues and place that with the meal receipt.

Documentation the key.

This won't guarantee you that an agent won't ask about it or argue with you on its deductibility; however, you have enough "substantiation" to make a solid argument in my opinion.

Let's just say, for argument's sake, you don't have documentation...what happens?
If audited they'll disallow the deduction.

What if other meals of a business nature are coded as "entertainment" and not documented at all?
Same as above....most of my clients have excellent memories though.....if audited they always seem to remember who they were with, how they relate to the practice and the topics discussed... 

What about a study club? I also wonder where that falls.

True study club meal? Totally deductible, no question about it. Some of the study clubs I've spoken at have a set price for the dinner and they offer a choice of selected appetizers, main courses and deserts and the club builds that into the cost of the monthly meeting or dues for that month so there's no "meal" that the individual pays for, the cost is to attend the meeting and the meeting provides food. No different than attending a full day CE course at a hotel conf room and they provide lunch. Do they break out the price of the lunch from the cost of the CE? Absolutely not.

Now, if one wants to have "drinks" with a few selected colleagues to discuss one of their cases and call it a study club, just remember, who's the expense going to? The study club or the restaurant? When audited you can call it whatever you want, just be prepared to have it questioned and be prepared to support your position. Worst case is they disallow it and you'll owe a few bucks.

By the way, there's nothing in the tax code that PROHIBITS a taxpayer from arranging their affairs around business meetings. It DOES prohibit one from trying to deduct a personal expense. If you know the rules, then you know how to arrange your affairs to meet the rules. If it meets the rules, it's deductible and can't be disallowed.

I don't mean to make it sound so simple; it certainly takes a little effort to abide by the rules in some situations, however, that little effort can generate a 40% discount!

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Tuesday, May 8, 2012

IRS Mistakenly Tries to Tax Roth IRA Conversions

Tax year 2010 offered a special one-time election to postpone the tax on Traditional IRA’s convertions to Roth IRA’s in that year.  Here we are now, learning from the IRS notices being received by dentists who took advantage of this tax postponement, that the IRS did not have their systems properly programmed to recognize this postponement option.  

It seems every dentist who elected the postponement is receiving an IRS notice whereby the IRS is proposing that the Traditional IRA withdrawal is taxable in 2010 - when in fact that is not the case.  

If you have received this notice, feel free to contact us.

Darryl Bodnar, CPA 

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Wednesday, May 2, 2012

Business Expenses Deduction Questions for Part-Time Dentist's 1099


In 2011 my majority of income is from W2 as an employee, but there is a small portion ($8000) from 1099-MISC as an independent contractor. The W2 employer only paid my malpractice insurance premium, but I kept another long-held malpractice insurance paid by myself.

Can I deduct the second insurance premium?

I believe you can 

As well as other expenses like ADA and local dental society dues, CE courses, license renewal fee etc on Schedule C filed for the 1099-MISC?The answer is yes. Then the question is: were any of these expenses related to your employment income as well? I'm guessing they were so you have to at least consider whether these expenses need to be allocated between Schedule c and Schedule a.

By doing so about half of 1099-MISC income would be written-off, will that trigger an IRS audit?

It shouldn't.

Thanks for the quick response. Yes all the expenses are related to both W2 and 1099-MISC jobs. So how can I allocate the expenses to Schedule A and C?  Proportionally based on the income of these two jobs, or a half-half split? 

There's no defined way to allocate. It’s up to the taxpayer though there should be a method that's logical. For example, if your employer paid malpractice that covers the W-2 I'd have no problem allocating 100% of that to Schedule C. If you paid dues and you can show your employer didn't require them I’d allocate them to your Schedule C. Things like DEA licenses, etc... should be allocated in my opinion and I see no problems using an equal allocation unless you can justify a higher allocation to the Schedule C, just be prepared to support your decision. Worst thing that can happen with any allocation is that you get audited and it disagrees. They'll just reallocate.

What if I wrote off disability for the last two years?  Am I screwed?  What if I start not writing it off now?  Any insights on what can happen then?

No- Generally the more distance you put between a possible disability and when you deducted premiums the safer you'll be in an audit.

Is it the same for life insurance premiums?  Should you not deduct those also?

Generally premiums for life insurance are not deductible, however, there are some exceptions. Two quick ones that come to mind:

1. if your lender requires it as a condition of their loan
2. as employee fringe benefit up to $50k of insurance

There may be other exceptions as well...

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