Kathy Collins

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The Anatomy of Tax Surprises and How to Avoid Them

Posted by Kathy Collins on Tue, Apr 11, 2017

By Kathy Collins
CPA, Four Quadrants Advisory 

We’ve talked a lot in this space about the good, the bad and the ugly of taxes for the Dental enterprise. But then there’s the ugliest – the one many of you have experienced in one form or another and one of the most hated experiences in Dentistry – the dreaded tax surprise.

As an accounting, financial, and business advisory firm for dentists and specialists in more than 30 states, Four Quadrants defines a tax surprise as any tax refund or tax owed over $10,000 in a given year.

Everyone already knew that if you owed a decent amount of money, it was a surprise, but a big refund? It’s just as much of a mistake, but certainly easier to stomach. So if either of these are happening to you, something is broken.

Once you get the dreaded call (likely occurring between December-April 14th), your options are pretty limited. Sure, there are payment plans available from the IRS, but one way or the other you’re going to end up having to pay that full amount immediately.


The way to avoid or, at least, mitigate those tax surprises is to plan for them by managing the tax liability consistently throughout the year. And unless you have an accountant versed in the nuances of Dental practice operations, change will be needed. But trust me, it won’t be as painful as getting another bill from the IRS for five figures.

Read our guide: Dental Accounting 101

Begin this journey by asking some specific questions: Is it a ‘one-timer,’ like an expensive new piece of equipment or a sharp drop in overhead that caused the surprise? Or is it a deeper, consistent problem in your accounting systems that you need to solve by coming up with specific policies and procedures?

If it’s simply from a one-time windfall, there’s a relatively easy fix with the right help. You need better communication with your accountant to make sure they know what you have coming in and going out monthly, and can more accurately assess what your tax obligations are going to be earlier as opposed to later. We suggest a minimum of four tax projections per year to stay on top of this—and that very rarely ever happens.

yikes.jpgIf the surprise is more consistently prevalent, the relationship between you, your bookkeeper, and your CPA is in bad shape and will need to change because your current system is broken. Going forward, you need to make sure your entire tax and financial team are on the same page, with the same goal – keeping your tax situation under control on a monthly basis.

If your bookkeeping and financial analysis are more than two months behind, it’s not all that helpful for you. You need to update accurate numbers on a frequent basis. They need to lead to quarterly tax estimates that are delivered promptly each quarter, not an estimate every six months or once per year.

Ideally, an estimate that takes into consideration current practice trends, past trends, and realistic expectations for the remainder of the year should yield a much more reasonable, customized estimate.

If you’ve experienced one or more of these tax surprises in the last five years, you’re not alone. Tax surprises and poor communication are the status quo for most dentists before they come to our firm. But that doesn’t mean you have to continue to accept it for your practice. Make the changes you need to make to be sure your tax bill will be regular, predictable, and easy for you to handle.

Your sanity will thank you.

If you have struggled with tax surprises, or would like insights on how you can avoid the next one, contact us directly at (877) 720-6213 or send us an e-mail so we can determine together the best place to begin.

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Topics: dental tax, Tax Advisory, IRS, tax surprise

3 Ways Your Accountant Makes Tax Day EVEN WORSE

Posted by Kathy Collins on Mon, Apr 18, 2016

taxshockLet’s face it, a lot happens in life outside of our control. But tax uncertainty doesn’t have to be your tax reality. Just like the running of a dental practice is a unique animal within the health care industry, accounting practices for dentists should be too. And if your tax advisor doesn’t provide “dental-specific” accounting, surprises will remain unpleasant and erratic.

As financial and business advisors for dentists/specialists in more than 30 states, Four Quadrants defines a tax surprise as any tax refund or taxes owed over $10,000 in a given year. So if that’s happening to you something is broken.

By managing a client’s tax liability consistently throughout the year, surprises can be mitigated and even eliminated. Here are three ways your current tax advisor or accounting system is hurting your practice

1. Missing the mark on estimated taxes -
Most accountants calculate your 2015 estimated taxes based on your prior year profits. This works great for the Q1 payment, but most accountants almost always fail to evaluate business profitability throughout the year. How does this happen? Say, for instance you have a year of decent growth and a drop in expenses. In a practice that collects $1 million a year your practice's net profit can easily swing more than $100,000. This translates into a $40,000 surprise your accountant didn’t detect.


2. Infrequent reconciliation of books 
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Most dentists are lucky to meet with their accountant once or twice a year. And when they typically have the “tax-planning meeting” late in the year, much of the opportunity to spot and avoid tax surprises has passed. A semi-annual or even quarterly reconciliation just won’t cut it. Outdated numbers lead to a lack of monitoring; this lack of monitoring means your accountant didn’t catch the $100,000 in profit until you have very little time to plan for it. How are you going to cobble together an additional $40,000 to cover a tax surprise from a situation that otherwise should be celebratory?

3. The detection of a problem late makes new problems appear where there were none -
As this snowball builds upon itself, you realize why so many people dread “April 15th.” Just as you pay for the mistakes of 2014, you will also have to pay the estimate for Q1 2015—the proverbial “double-whammy." How could an unexpected increase in revenue cause so much PAIN?
 

If these examples sound familiar you’re not alone. In a desperate attempt to avert the pain above, many of your colleagues hoard cash. In other instances they ride the peaks and valleys of thick and thin monthly income waves pinching the pennies just in case.
 

Read our guide: Dental Accounting 101

No matter who you are or what you produce, subjecting yourself, your employees, and your family to this cashflow roller coaster constricts your opportunity to build wealth long-term. The ultimate failure that results from bad tax planning is the inability to save enough for retirement consistently and we think that is an absolute tragedy that is often overlooked.

Planning to avoid tax surprises and calming tumultuous income waves is what we do. Ultimately it’s our goal for all of our clients to stabilize their practice income so they can save $100,000 or more each year for retirement. 
For more information, download our success kit or contact us today by filling out the form below!

 

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Topics: dental accounting, dental CPA, Tax Advisory, tax time, IRS, tax surprise, tax refund

VIDEO: 3 Questions We Ask Every Prospective Client

Posted by Kathy Collins on Fri, Jun 12, 2015

Every important relationship starts with a conversation.

We like to start a conversation by asking questions that allow both a prospect and Four Quadrants determine where they are in their dental practice.

The dentist discusses the issues they’re facing, how they’ve tried to solve them, and what has or hasn’t worked. We use that to determine whether or not the practice is ready for our brand of help. If so, we move on to the next step together. 

If not, we offer baseline materials to help get the practice to the right starting point.

Click the play button on the video below to discover the Three Questions We Ask Every Prospective Client. . .  

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Topics: dental accounting, dental CPA, Tax Advisory, tax time, IRS, tax surprise, tax refund

5 Things You Can Do Right Now to Get Your Taxes In Shape for NEXT Year

Posted by Kathy Collins on Wed, Apr 29, 2015

By Kathy Collins, CPA,
Four Quadrants Advisory

yikescalc

April 15 was only two weeks ago. And let me guess . . . it wasn’t the highlight of your Spring?

If you run a dental practice, preparing for this day always seems to be crammed with equal parts uncertainty and anxiety.

But Tax Time is no longer a day our clients fear. We customize an actual plan for each of them so they can avoid an unexpected tax bill or tax refund that wreaks havoc on bank account stability and retirement savings balances.

Read the Guide: Financial Planning for Dentists

So let’s get your retirement back on track by implementing 5 proven strategies to make 2015 your smoothest - and most predictable - year ever.

1. Convert your company to an S-Corporation - 

This structure will allow for better cash flow and more predictability (no more bank account roller coaster games) when a compensation structure is planned properly.

WHY DO THIS? — Although taxes still need to be managed in an S-Corp., this is a huge step toward reducing the dreary year-end tax surprises because more taxes are spread throughout the year with a consistent paycheck. 


2. Hire a dental-specific accountant 
This is not a CPA that has “some” dental clients, this is a CPA that has “exclusively” dental clients. By being a specialist, and knowing dental terminology, they can develop a dental-specific chart of accounts (i.e. list of expenses) and be aware of financial issues that are unique to dentistry.  
WHY DO THIS? — The frequent, consistent numbers will allow your CPA to communicate great ideas and proactive advice.

3. Develop an appropriate safety net -
Having the money to pay a tax surprise makes the sting of the surprise slightly less painful, but having structures in place to ensure this happens is harder than you think. You need to be disciplined and be a numbers-hawk consistently. We show you the calculations that go into establishing your minimum practice cash reserve.
WHY DO THIS? — This balance will float up and down against the ideal as overhead fluctuates, so be sure to take your income in a predictable manner. This makes it easier on the cash flow and bank balances and is more predictable to manage.

4. Devise a more cash flow-friendly income structure - 
Most tax advisors suggest you take home most of the cash reserve or stab in the dark at where you should set income. Structuring income this way often results in huge quarterly tax payments or sporadic, lumpy distributions—neither of which are friendly on your personal or business bank account.
WHY DO THIS? — It may not be sexy, but boring, predictable bank accounts are where it’s at folks. And we hear more sleep at night from less stress does wonders for the complexion!

5. Re-evaluate your retirement plan -  
Not all 401Ks are created equal, and you should learn how to identify whether yours is outstanding or mediocre. We recommend a fee-only investment environment, free of commissions that can penalize a proactive involvement.

WHY DO THIS? — By adding a generous match and allowing a profit share component you’ll be shocked at how much retirement savings can accumulate without the complication and expense of other “sophisticated” retirement plans. Additionally, you’ll get the benefit of being able to shelter money from Uncle Sam via tax savings with a great retirement plan structure.
 


Ultimately it’s our goal for all of our clients to stabilize their practice income so they can save $100,000 or more each year for retirement. 
For more information, download our success kit or contact us today by filling out the form below!


 

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Topics: dental tax, dental accounting, dental CPA, Tax Advisory, IRS, tax surprise, S-Corporation, cash flow, fee-only investing, cash reserve

The Tax Implications of Starting a Dental Practice Transition

Posted by Kathy Collins on Fri, May 9, 2014

tax2The decision to begin the process of transitioning your practice into the hands of your successor is a tough one, of course. It’s been the center of your life for years, and even if you’re totally ready to ride off into the sunset of retirement, it can be tough. If you don’t have your financials in order before you start the process, it can be torture. That includes your taxes.

The way your practice is structured as a business will have a major impact on your tax obligations after selling. There’s a significant difference between what you’ll owe after selling a C-corporation and what you’d own from selling a sole proprietorship, for example. And that all needs to be taken into account before making the sale.

There are two ways to sell your practice – by selling a partnership interest or stock, or by selling off the practice’s assets. Generally you as the seller will prefer the first option, as it carries with it a capital gain treatment of 15-20%. The buyer, on the other hand, will prefer a sale of assets, because then they will reap the benefits of depreciation. If it is not pre-determined by the transition structure in place, you can negotiate with your buyer, and find a level of price and sale type that suits you both the best.

You’ll also need to negotiate the method of financing your buyer will use. In the event that they cannot or prefer not to go through a bank, it’s possible they could pay through seller financing – that is, essentially you would hold a note on the purchase price as negotiated, loan the money to the buyer, and they would pay you back over time. You get the benefit of keeping the bank out as a middleman, and won’t have to recognize the gain from the sale all at once. The flip side to this option, however, is that you lose the time value of money of getting that money to work for you in the market. There are times when seller-financing is ideal, but for the most part, it is not the first choice by anyone because it muddies the relationship between partners.

But when negotiating price, remember this – you won’t be keeping all of the money paid, no matter what. Even if the bank’s not involved, it’s income and you will be taxed for it. So don’t start eyeing that yacht or Lamborghini until the whole procedure is complete – including your tax liability.

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Topics: dental advisor, Practice Transition, dental retirement, dental tax, Tax Advisory

Do You Have a Reactive Accountant?

Posted by Kathy Collins on Fri, Feb 28, 2014

accountingIt’s important to have a great – not just good – relationship with your accountant. They have a big role to play in running your practice, and helping you to build a financial foundation that will allow you to do the things you want to do in life. But if your accountant doesn’t work proactively for the health of your practice, that relationship is broken. Here are a few ways to tell if your accountant is more reactive than proactive – so you know whether you’re getting everything out of the relationship that you should be.

Tax surprises

Clearly, if you get to the end of the year and you have a bill from the government for $30,000, something has gone wrong in your accounting. But what?

More than likely what has happened is your accountant isn’t keeping regular tabs on your tax obligations. As the client, you have to be responsible for getting your monthly statements and other financial information to your accountant in a timely manner. If you don’t, they can’t help you. But if you do, and the tax surprise still pops up, then you have a problem.

Read the Guide: Financial Planning for Dentists

One way or the other, if your accountant is making decisions based on data from the previous year rather than your dental practice’s current and changing status, your tax bill is not going to be what you expect. Monthly bookkeeping and reporting is absolutely crucial, and if your relationship with your accountant is not a proactive one, you will get hurt.

Law changes

Anyone in the medical field knows that things are changing fast right now, with the introduction of new rules from the Affordable Care Act (or Obamacare, if you prefer). But unless you’re an expert on law and finance in addition to dentistry, you probably have some confusion as to how your practice will be affected.

And if you don’t know how to deal with coming changes until they’ve already happened, you’re unlikely to be able to handle them properly. You need to know what’s coming as soon as possible, and how to position yourself to make the most of the new normal. If you can’t get out in front of changes in the law, you’re probably going to end up getting left behind.

Read our guide: Dental Accounting 101

Mass emails or newsletters

Another way this can manifest itself is through communications that aren’t tailored for you. For example, when the Affordable Care Act changes go into effect, your accountant might send an email to all of their clients with information on changes and how they affect dentists. But rather than telling you how your practice is affected, and how you should deal with it, all you get is a generic cookie-cutter response.

You need to know what you need to do, not what Bob the Generic Dentist needs to do. You need counsel that’s specifically geared toward the situation your practice is in, and the goals that you have for the future. Otherwise, you may get off track.

One way or the other, if you aren’t getting what you need out of your relationship with your accountant, you need to either work to sort the relationship out, or find a new accountant. Too much depends on that relationship to allow a dysfunctional one to fester.

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Topics: dental tax, dental accounting, Financial Planning, Tax Advisory

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