2015 Tax Extenders Passed!

On December 18th, Congress and the President signed into law the “Consolidated Appropriations Act, 2016” and “Protecting Americans from Tax Hikes (PATH) Act of 2015”, both of which provide a number of significant tax changes. The Protecting Americans from Tax Hikes Act will grow our economy and help American taxpayers keep more of their hard-earned dollars. This Act extends a number of important tax breaks and makes many of them permanent.

Keys Facts You Should Know 

According to Accounting today, here are some of the over 20 permanent provisions:

• Increased expensing limitations and treatment of certain real property as Section 179 property;
• The exclusion of 100% of gain on certain small business stock;
• Reduction in S corporation recognition period for built-in gains tax;
• The enhanced Child Tax Credit;
• The enhanced American Opportunity Tax Credit;
• The enhanced Earned Income Tax Credit;
• The deduction for certain expenses of elementary and secondary school teachers;
• The deduction of state and local general sales taxes;
• Basis adjustment to stock of S corporations making charitable contributions of property.

For the full list of permanent tax provisions, click here. 

Provisions extended and modified through 2019

• Bonus depreciation (50% for 2015-17, 40% in 2018, 30% in 2019);
• Delay on high-cost heath insurance plans (so-called “Cadillac” tax) from 2018 to 2020;
• The New Markets Tax Credit  providing $3.5-billion allocation each year through 2019, the carryover period for the credit has also been extended to 2024;
• The Work Opportunity Tax Credit modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) to 40 percent of the first $6,000 of wages.

Provisions revived and extended through 2016

• Modification of the exclusion of mortgage debt discharge;
• Mortgage insurance premiums treated as qualified residence interest;
• The above-the-line deduction for qualified tuition and related expenses;
• Over a dozen incentives for energy production and conservation.

For more information on these tax provisions and how they may impact your business or personal tax situation, please contact your Dental CPA tax representative directly.  You can also contact our office at 410-453-5500, and one of our staff members will be happy to assist you.

Why You Need Certain Information for Your Due Diligence – Part II

I decided to write this blog series mainly because of the pushback we get from sellers’ advisors on some of the information we request when representing the buyer. The second items I’ll discuss are the practice management reports for production by provider by ADA code and production by payor.

What’s interesting about the pushback we get on these reports is that we want these reports when we’re representing the seller and assisting them in coming up with an asking price or a value for their practice. We believe we can do a more thorough job for the buyer if we have this information.

Of course, we’ll get the standard response of “it’s in the information we already sent to you. Unfortunately, that’s not correct. Many times what they’ve provided is a summary of the production by category like diagnostic, preventive, restorative, etc. and it’s usually for the entire practice, not by provider. While this might be good information for practice management consultants to get an overview of the practice for their consulting engagements, it’s never enough information for a buyer who needs to understand how the collections are being generated and who’s generating them. We may also get a fee schedule and/or a practice production by ADA code. Again, good information, we just need more.

You see, the buyer is in a different position than the seller. The seller knows what they do; they know what their hygienists do, but guess what, the buyer has no idea. The seller could be performing procedures that the buyer doesn’t perform which could mean the buyer can’t replicate the seller’s collections. Or, maybe the buyer does procedures that the seller doesn’t so there may be some upside potential for the buyer. You can’t determine that without seeing the procedures, ADA code no matter what the practice questionnaire might state.

The other problem we often see is that many practices put the doctors’ exams under hygiene production. So we’re told the hygiene production makes up 40% of the total revenue of the practice when it’s more like 25%, which is closer to normal. Without seeing the detail and taking the seller’s word, the buyer might draw an incorrect conclusion that there’s a lot more dentistry to be done.

The two other aspects of knowing the true production by provider is A) we can evaluate the hygiene production to their wages to see if it falls within industry norms and B) we can better assess “reasonable” compensation for a dentist when performing our price assessment. We see valuation reports that have used incorrect assumptions based on bad PM reporting where practice prices have been overstated because “reasonable” doctor’s compensation has been understated based on dentistry of only 60% of total practice revenue instead of 75%.

The other PM report we ask for, production by payor, shows the total number of PPOs in the patient base. This also becomes important when trying to assess the collections generated by PPOs in which the seller is IN network with and the percentage of patients in PPOs where the seller is OUT of network.

Many of you already know about the Delta Premier issue, where buyers may not be able to retain the Delta Premier fee schedule w/o also participating with the regular PPO and therefore, a buyer won’t be able to replicate the seller’s collections in many cases. However, what many buyers of FFS practices fail to understand is the percentage of patients in a FFS practice that belong to PPOs. The buyer runs the risk of having those patients leave the practice to look for an IN network provider when the seller leaves the practice. The attrition rate is generally known to be higher in a FFS practice for a buyer anyway; if the buyer also knows that 40% of the patients have a PPO, then they need to appreciate that the risk of attrition could be worse.

This report will also be helpful to a buyer who is buying a FFS practice with the intent of potentially joining PPOs in the future, or a buyer of a PPO/FFS mix practice who has the intent of potentially dropping out of some PPOs in the future. It’s very useful information for the buyer and, unfortunately, we get pushback from sellers and their advisors when asking for these reports.

So here are some real life examples of why these reports can be very enlightening for a buyer:

1. I’m in the middle of an assessment right now on an FFS practice where the top ten PPO payors represent about 35% of the practices total production. For the buyer, if they remain FFS, they run the risk of higher than normal attrition as patients may take the opportunity to go to an IN network provider. The buyer is also contemplating joining some PPOs as the practice revenue isn’t very high so they now know what the potential impact could be to the existing patient base and revenue by getting into certain PPOs.
2. As mentioned above, we’ve seen valuation reports calculating reasonable doctor’s compensation for dentistry using a lower doctor collection figure because the doctor’s exams were under the hygiene production column. This has the effect of creating a higher value than would otherwise have created with proper information.
3. We’ve seen other dentistry codes thrown under the hygiene column like crowns, extractions, etc., almost always by mistake. However, with production by provider by ADA code reports we can make the proper adjustments and provide a more accurate picture of practice price and performance for the buyer.
4. We’ve seen situations where practices were labeled FFS when in fact they were a mix FFS/PPO practice and the PPO portion was significant enough that the buyer chose to walk away. We determined this when comparing collections to gross productions were less than 85% of gross production. In FFS practices, collections are generally greater than 90% of gross production.
5. Lastly, we’ve seen production by provider reports that show other doctor providers in the past, like specialists where their revenue wasn’t removed from prior year collections even though their compensation was removed. Needless to say, prior year collections were overstated so that the asking price was way overstated. We would have NEVER known this if we only relied on a tax return and/or P&L collections.

The fact is most practices have the PM software that can generate these reports easily, even if the office has to contact the software company to find out how to generate these reports. There isn’t any reason why sellers and their advisors can’t provide these reports and in our opinion, there isn’t any reason every buyer shouldn’t be asking for these reports.

Written by Tim Lott, CPA, CVA. For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling 844-DENT CPA or emailing info@dentalcpas.com.

Why You Need Certain Information for Your Due Diligence – Part I

I decided to write this blog series mainly because of the pushback we get from sellers advisors on some of the information we ask for when representing the buyer. The first item I’ll discuss are W-2s by year along with an employee roster for that year noting positions, average hours worked per week, hourly rate and any other benefits received.

Naturally one of the first responses we get is “why do you need to see the W-2s, all that information is either on the tax return or in the practice profile under the staffing section”.

Unfortunately, while the advisors mean well, they’re incorrect. The tax returns don’t list each employee, their wages, the department they work in, the hours they work, their hourly rate or the benefits like paid vacation and sick time. The tax return does show total wages; maybe an expense category called employee benefits and/or group insurance, however, it won’t tell you how much is for the staff and how much for the owner.

The practice profile may list this info in more detail, usually ONLY for the current year though and we all know employees come and go and sometimes the practice changes on the number of staff, etc.

Another reason we want to see the details is to help the buyer assess the performance of the practice. We want to be able to tell the buyer what percentage of revenue is assistant wages, hygiene wages, front desk wages and admin wages. We also want to be able to verify any adjustments the seller’s advisors made to wages for owner family members who may get paid, but their compensation may not be market value. While we’d like to accept their adjustments as accurate, you’ll see below it’s not always the case.

So here’s a list of real life experiences we’ve encountered by having the W-2 and employee roster information:

1. I’m in the middle of an assessment right now where the owners’ wages per the tax return were shown as $210,000 while the W-2 showed $260,000. Why the difference? The owner took a $50,000 bonus in December and when the internal p&ls were prepared they were coded to office wages (front desk/admin) and the tax preparer used the p&ls to prepare the tax returns. Needless to say, after normalization adjustments to overhead it was still overstated by $50,000.
   
2. We’ve seen on numerous occasions where the seller’s advisors who prepared the work to establish an asking price made reductions to overhead for family wages based upon what the seller told them about how much their family was getting paid. Unfortunately, that information was for the current year and not necessarily the same for the prior years, and the advisor assumed the same reduction in prior years for the family wages. In one case, the reduction was $35,000 for three family members where the owner JUST put them on payroll for the first time. So the $35,000 reduction in prior years was incorrect.
   
3. We had a case where the advisor reduced owners wages to normalize overhead by the tax return wages noted on line one for “officers” which most of the time is JUST the owner. They also reduced the staff wages by the spouses’ wages of $75,000. That would have been fine EXCEPT the owners wages were $75,000 lower than what was stated on the tax return because the tax preparer added the spouse wages to that line since she was listed as an officer. So they reduced overhead by the spouses’ wages TWICE.
   
4. We’ve seen on numerous occasions where potential buyers will back off their pursuit of a practice because the total wages are very high as a percentage of revenue compared to the norm. However, when we break it down by department and realize the hygienist and front desk wages as a percent of revenue is fine and it’s the assistant wages that are out of whack, the potential buyer reconsiders because they know they can likely improve upon that issue fairly easily.
   
5. We’ve seen advisor worksheets that reduce overhead by the amount the associate was paid in wages for all years, again, based on current year information. However, when we get the W-2s for prior years, we see that the reduction for prior years isn’t accurate. The advisor simply assumed the associate made about the same.
   
6. And lastly, my personal favorite…..we’re assessing a practice and when we ask for the W-2s we get a LOT of pushback….the seller and their advisors kept insisting we didn’t need them, the wages on the tax return were accurate and they could give us the breakdown by department. We insisted and the buyer was willing to walk away if we didn’t get this info. When they finally decide to give us the info they then proceed to tell us the W-2 totals will be greater than the tax returns because the doctor also works as an IC about 30 minutes away and receives 1099 income personally and they allocate the wages between the practice tax return and his IC income. Hmmm, ok, well let’s see the sellers’ personal return where this activity is being reported so we can review that and verify the allocation seems reasonable. Well, they resisted that of course & finally told the buyer they were no longer interested in selling the practice. Here’s the kicker, just about every overhead expense was on the low end of the normal range if not below the normal range and we suspect they were paying quite a bit of the practice overhead FROM the IC bank account (the personal bank account) and, therefore, making the profit look much more profitable then it appeared.
   

The fact is in the vast majority of the assessments we do the wages reconcile with the tax return and the adjustments made by the sellers advisors are accurate. Still, by having this info we’re able to provide so much more info to the prospective buyer about the wages statistics on the practice that goes beyond the price.

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

For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling 844-DENT CPA  or emailing info@dentalcpas.com

Getting A 2nd Opinion On Your Tax Return

Our Dental CPA team recently reviewed the 2014 income tax returns for a prospective client and were shocked at some of our findings. Had we been engaged for a year-end tax planning meeting well in advance of 12/31/14, this doctor would have saved almost $35k in taxes and other areas. Here’s what we found:

–         Owner Wages Too High
The client paid themselves wages of $130k which created an S-corp loss of $30k!(Yikes). The problem is they did not have a basis in their S-corp so the $30k loss was NOT deductible. Instead, what they should have done is kept their wages at no more than $100k and the S-corp income would have been $0 which would have lowered their income tax bill by at least $10k.

–         Spouses Wages Too High
We learned that they also paid their spouse to help manage the practice, which is a good idea, however, instead of a wage of $60k they should have kept it around $30k and saved $4,500 in payroll taxes on $30k of wages. In addition, they had S-corp losses from prior years to use up so the additional S-corp income of $30k that would have resulted would NOT have been taxed, saving another $10k in income taxes.

–          Not Reporting All Expenses
There were expenses missing or almost non-existent on the client’s corporate return such as meals, entertainment, automobile expense, travel expense, etc. We were told that these expenses existed, however, their preparer told them they were too risky to take even though we knew they could be substantiated. By failing to report these expenses, the clients likely missed out on at least $5k of deductions costing them around $2k in taxes.

–         Owner Occupied Rental Activity Loss
The Corporation rents the space they practice out of which the doctor owns personally thru an LLC. The activity generated a loss of $2,500 on the individual tax return which was not deducted and as owner-occupied real estate and making the proper election they were entitled to that deduction costing them $800 in taxes.

–         Other Unaddressed Issues
There were a couple other issues with the returns resulting in an additional $1,500 in taxes that could have been avoided. They also had the wrong retirement plan that likely cost them around $5k in unnecessary employee contributions.

Do yourself a favor and contact our Dental CPA team. We are happy to provide 2ndopinions on tax returns as a courtesy. There may be something that you can do BEFORE the year ends to lower your tax liability for 2015. Our team is here to guide you through the necessary steps. Contact us at 844-DENTCPA (336-8272) or email info@dentalcpa.com.

Production by Procedure Report in Practice Acquisition.

Here is a guest blog post from Dr. Richard Wyne, DDS

The production by procedure report is a very simple report to review when doing your due diligence on a potential buying opportunity that offers a wealth of information. A quick scan allows you to gauge the size of the practice, search for fraud/malpractice and shows you how the previous dentist practiced. All of this information can tell you if this is the right practice for you, or if you should keep looking.

The first and most obvious is the fee schedule. From this report, you can either directly see the fee schedule or do some quick division to find out what the doctor is charging. If the doctor is charging appropriately for the area? You can contact the company Renaissance for a quick area fee assessment to see if the previous dentist’s fees are high, low, or just right. (They are never just right).

Super high fees will be tough to justify to patients as the new doctor. A longer transition may be needed.

Average fees require little to no change initially, but some minor tweaks can bring in more money.

Unusually, low fees can be good and bad. Good in that if you raise them the office will make more money. It is bad in that the previous doctor has most likely been attracting patients looking for the lowest fees. Any noticeable change will send some of these patients running. So the patient count is actually lower than it appears because you will be losing some.

On to codes.

Perio vs prophies. Are they doing 4910, and 4341/4342? A lot of old docs do not at all. Some don’t even own a perio probe. That means you are going to have a lot of patients with undiagnosed perio. It is a train wreck to convince them. So expect a lot of work maybe a few years to build up trust but an increase in profits. On the other hand, if they are doing more patients with quad scaling than prophies they are probably over diagnosing. To keep income up you would have to continue doing that (committing fraud/malpractice).

Prophies+perio vs x-rays. A lot of old docs have weird x-ray policies. Some never take FMX/PAN's, some take 2 BW's instead of 4, and some take them every 6 months some every 3 years. Some take PA's at every visit on every patient.

So do the math. They did 1000 prophies and took 250 sets of BW's. That means they are doing BW's approximately every 2 years. If you up it to once a year you'll double the income coming in from BW's. If they are doing 1000 prophies and 1000 BW’s that means every 6 months which is overkill for most patients. Your best case scenario is an office that takes x-rays less frequently than you are comfortable with. The office would make more money on day 1 after you took over. Worst case scenario is an office that takes x-rays more often than you are comfortable with. The office would lose money as soon as you took over.
If they only do 2 BW’s at a time which some older docs do, you could increase profits a little by doing 4 which is generally the standard of care.

Are they taking 1000 Pa's and doing 1000 prophies. That means they are taking a PA per patient so probably fraud there. Some insurance companies are going to begin requiring scripts for every PA. You can assume 100% of patients don’t need an individual PA taken on them and taking way too many single PA's is a way some offices try to increase profits. It’s also sometimes done instead of an FMX to increase billing. If you see unusual amounts of PA’s per cleaning apt ask why.

How often are FMX/PAn's are done? Insurance covers every 3-5 years so 1000 prophies and 166-100 would be right on that line. Fewer means they are taking less, more means they are taking more. What frequency are you comfortable with? Also more FMX/PANo’s than normal can come from other sources. Lots of new patients will mean more than typical amount of PAN/FMX so compare to NP count given by office and to code 0150. A new Pan machine will also greatly elevate the amount of Pan’s being taken. That number will die down with time but could give the practice a massive bump that you may not get to cash in on as it dies down.

Example: the previous dentist takes no FMX/PAN’s, buy’s a PANO one year before practice goes on the market. Every patient is due. Pan to prophy ratio can be massive 50% or more. Remember it will not stay massive it will die down once everyone has had their pan so be careful.

Comp exam count will give you NP count if they doing it right. So when the doc lies to you and says they get 30 NP's (they always overestimate) a month but do 30, 0150's a year you know they are way off.

Limited exam 00140 some docs charge some don't. See how many they are charging and make sure it is in line with your personal practice management philosophy or account for the difference in income. 09110 palliative exam same thing see if they are using this code.

Fl varnish. Are they doing it to adults? Look for the 1206, 1208, 1205. Various other assortments of codes are used for this. Sometimes it’s processed as an application of desensitization medication. Compare to the amount of kids in the practice. Do you want to do it on adults? Income could go up or down based on the answers and what the existing office does.

Pedo prophies 1120. How many did they do in a year and divide by 2. That's how many kids are in the practice roughly. Some doctors just don’t see kids. If you see very few pedo prophies either the doctor doesn’t see kids or there just aren’t any kids in that demographic. If they don’t see kids and you do, expect a small boost. If you hate kids and the office does more 1120’s than 1110’s. You are in trouble.

1351-1352 check sealants per prophy. If they are doing a bazillion then they are an office that seals every groove on every patient adult or child. Are you ok with that? Is that how you practice? If they never do any there's a chance to increase profits there.

Fixed
Crowns/exam Insurance companies say around 20% is average.
So for every 100 exams that's 20 crowns. Personally I do a lot less, more like 10% but if the office you are looking at is rocking 50% - they are crowning everything. If you are more conservative you could see a massive decrease in collections. If the office is far lower, doing just a couple %, they may be doing a ton of massive fillings. Check the big filling/core/big amalgam codes.

Look for inlays/onlays. Do they do them? Do you want to do them?

Are they doing amalgams or composites? Check that one out too. If they do nothing but amalgam that's what patients will expect you to do. You can change just expect some resistance and plan on still doing some amalgams.

Are the composites direct or indirect? Different codes that pop up for indirect composite inlays/onlays.

Specialty Procedures.
Look for endo/ortho/oral surgery/dentures/implants. Do they do them? Does it make up a large part of the practice?
If only oral surgery code he uses is 7140 then they are only doing the easy ones. It also gives you an idea of the patient base. If they are doing a butt load of dentures, you better like dentures because that's who's in your office. If the doctor does procedures you do not do, you will make less money. If there are procedures the doctor does not do, and you are proficient at them, you will make more money.

You can also get a total patient recall count from (prophies+perio maintenance per year)/2. That gives you a real ballpark of whether there is a good recall system in place or if the office is more of an emergency clinic. If the total patient count given to you by owner/broker, is similar to (prophies+perio maintenance per year)/2, then this is a hygiene driven practice with good systems for retaining patients. If the numbers very widely, then there are a lot of emergency patients, who don’t come in for regular care. Neither is bad it just helps to know what you are getting into. Also, it’s nice to separate out the count. Dr. says 1000 active patients in practice. Last year they did 500 prophies.

That means 250 recall patients and 750 patients who come in when something’s wrong. You can re-verify that data by comparing it to the 0140/9110 codes. It won’t be perfect because some patients only come in once a year for cleanings or every 8 months, but it gives you an idea.

Finally, look for fake codes. Non-ada codes they use to track things or upcharge. Figure out what they are and why they are used. How much money comes out of these codes?

Thanks for reading.

Written by Dr. R. Wyne, DDS

About Dr. Wyne

Dr. Richard Wyne is a 2011 graduate of
the University of Maryland. 

He practices in Rockville, MD.