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

5 Common Ways Dentists Make Cash Flow Mistakes

Posted by Brogan Baxter on Wed, Feb 22, 2017

cashflowDentists aren’t usually business or financial gurus, and because of that they can run into a lot of problems when it comes to their finances. One of the main sources of these troubles is poor management of cash flow.

Read the Guide: Financial Planning for Dentists

But if you don’t know what to look for, how can you know what to fix? Here are five common hurdles dentists have to clear to get their cash flow situations in order.

Corporate and income structure

Choosing the right corporate structure and income schedule for yourself and your practice is crucial, and can help solve a lot of other cash problems. Operating as an S-corporation is most ideal, because it allows a dentist to take some income in a W-2, with taxes withheld every paycheck while remaining the business’s owner.

But an accountant might recommend a sole proprietorship to minimize tax responsibilities. This can slow your retirement savings – you can’t match as frequently on income from distributions, which is 100% of your income in a sole proprietorship. You’ll lose a lot of money from failing to look at the big picture.

Debt structuring

Dentists are naturally debt-averse, which sounds a lot better than it is. They’re likely to cut a check for a large purchase rather than financing, and when a piece of equipment costs upwards of $30,000, that could completely deplete your checking account.

It’s absolutely critical to make sure you have a baseline level of cash on hand in your accounts at all times to deal with surprise expenses, and that’s impossible if you pay for equipment and other planned expenses all at once. It may seem stressful to have debt to deal with, but it’s a lot less stressful than having a tax bill you can’t pay because of that shiny new x-ray machine.

Tax payments

The way you pay your taxes is intertwined with how your business is structured. Taxes are automatically pulled from your W-2 earnings in every paycheck, but not from money a dentist takes as a distribution. Practices that are run as sole proprietorships and as S-corps both need to make extra tax payments to cover the amount owed from distribution payments. But if 100% of your income in a sole proprietorship is coming from distributions, then 100% of your taxes need to be paid this way. And those bills can get big.

Since an S-corp allows you to be paid in W-2 income as well, that means that only a fraction of your income tax is your complete responsibility via quarterly tax payments. To an accountant, that may seem more complicated – after all, it’s two tax returns that need to be filed. But for the dentist, it ensures cash flow stability.

Quarterly tax payments fluctuate as your practice does. If you’re growing and the accountant doesn’t take that into consideration, it could mean that at year end, you haven’t paid enough taxes on your distribution income, and you could be hit with a surprise $80-100k payment. With the S-corp, with less of your taxes paid this way, even if there’s a surprise payment it won’t hurt nearly as much.

Overhead issues

An established dentist, one who’s been in charge of a practice for 8-10 years, should be running at around 55-60% overhead. In my time at Four Quadrants I’ve seen practices where the overhead level is closer to 90% or even 95%. That’s just preposterous. If your overhead is that high, something is horribly wrong with the way your practice is being run.

In a million-dollar practice, for every 1% drop in your overhead, that’s around $10,000 in savings that you can take home. Paying less improves your cash flow and puts more of your money where it should be – your bank account.

Decision-making

Think about the decisions you make in your practice. How many involve spending $30,000? Probably around one or two a year. How many involve spending $5,000? That’s probably more like one or two a month. Each one doesn’t seem big, but they add up fast – especially if you make the wrong choice.

When you make decisions about things like smaller equipment purchases, raises to employees, or fee increases, it helps to have someone on the outside to advise you. At Four Quadrants we have a “5K Rule” for our clients – if something’s going to cost you $5,000 or more, whether in your practice or in your personal life, ask us about it. We’ll look at the big picture and help you decide if it’s worth it, if now is the right time, and if there’s a strategy to help pay for it easier.

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

Don’t Let Tax Surprises Ruin Your Cash Flow

Posted by Four Quadrants Advisory on Wed, Aug 10, 2016

cakeby Jason Smith
President, Founder, Four Quadrants Advisory

My family knows better than to ever throw a surprise birthday party for me. I don’t like surprises and I don’t like the unexpected. I tend to arrive early to appointments, I over-prepare for most things, and I want to know what I’m getting into with everything I take on. Imagine you walked into your kitchen on a cool, winter evening after work and surprise! – your friends and family are there to greet you. Instead of a cake with candles on it, though, there’s a slightly different surprise waiting for you. A great big surprise tax bill.

You can’t put candles to this one, as much as you might like to. “Good news! Your dental practice revenues are up and overhead is steady or down. Bad news, though. We didn’t make tax adjustments along the way. Surprise!”

I’m sure most dentists don’t like surprises any more than I do, so we thought we’d share a simple technique that our clients and our CPA partners appreciate. A lot of CPAs specializing in dentistry stay on top of this, but frankly most don’t. Each fiscal quarter, we analyze a combination of revenue growth and overhead to determine which clients are likely to need tax withholding adjustments. For example, for those clients with revenue up and overhead down for the quarter by a combination of 10% on the upside, we’ll notify their CPA to make adjustments as necessary.

This has actually been an interesting barometer for the health of our clients’ practices across the board. In the third quarter of 2009, for example, we only had 15 clients that required withholding adjustments. The next year we had 28. We took this to be an indicator that we might be coming out of the deepest of the economic doldrums of 2010, particularly after looking at December numbers for most.

Read our guide: Dental Accounting 101

Our CPA partners like the added eyeballs on the P&L and appreciate having a second line of defense. This technique is one of many that make it a lot easier to save what is necessary to satisfy a well-crafted financial plan. A combination of really good analytics and communication between your advisors can keep your planning smooth. If all your advisors aren’t working together to champion great cash flow and savings, it’s tough to stay on goal.

Does this technique reduce your overall tax burden? No. Does it add anything to your retirement nest egg? Not really. Will it prevent you from clutching your chest from shock when you stumble into your “end-of-the-year Tax Surprise Party”? No doubt about it.

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Topics: dental tax, dental accounting, Tax Advisory

3 Ways To Deal With 2015 Taxes Now and Not at Tax Time

Posted by Brogan Baxter on Mon, Jun 29, 2015

By Kathy Collins, Four Quadrants CPAlookahead

Believe it or not, we’ve hit the middle of 2015! So do you feel like you’re at the high water mark? If you’re like most dental practitioners, it seems like all you’ve done so far this year is pay tax bills for 1st & 2nd quarter 2015 while shoring up any 2014 tax obligations. If you haven’t paid any tax bills yet this year then you definitely need to keep reading to avoid a very unpleasant surprise.

What was that line about taxes and death?

Anyway, chances are your business accounts are tighter on cash than you would like. The last thing you can afford is a large expense that comes out of nowhere. And when a dental practice isn’t prepared to handle its tax obligations properly, your tax bill could end up a lot heftier than you planned for.

Getting smacked again and again with a tax surprise doesn’t have to be a cost of doing business. Just ask our clients. While we will never make paying taxes pleasant, we can make the amount you pay predictable. This, in turn, opens up some new avenues for improving cash flow both in the practice and at home..

Here are three ways you can make the second half of 2015 perform better than the first:

1. Fix your practice structure
If the foundation upon which your practice’s finances are built is shaky, there’s a far greater chance of tax disaster. The corporate and income structures of the practice need to settle properly as the foundation before you build upon them. Establishing an S-corporation — instead of a sole proprietorship — allows you to maximize the amount of money you take in W2s, rather than distributions. Without taking these steps first, anything else you try to do will be a waste of time.

2. Put the proper systems in place
With a rock-solid foundation, you can now build a system to forecast financial expectations for the practice. The forecast should center around historical trends including changes expected on a yearly basis from season to season, and anticipated changes from improvements in logistics and practice management. If your practice slows down every year when school starts, or maybe hits the afterburners in the beginning of the year, plan for that in your tax payments.

Your system for accounting must be proactive, not reactive. This means account reconciliations should be done every month by your accountant, with the smallest number possible of uncertain or uncategorized transactions. The numbers should then be integrated into your business strategy and tax planning on a regular basis.

Regular tax estimates should be based upon financial forecast changes and the practice’s overhead. Using prior year tax liability is a recipe for disaster if it doesn’t represent what your practice is currently doing. For example, a large piece of equipment may have been purchased and written off last year but that may not reoccur in 2015. As a result, a huge tax surprise!

3. Advice Cohesion
Finally, your business management, accounting and tax advice need to have cohesion. In a vacuum, no one can make decisions that are right for your practice. They don’t have the whole picture. To build an intelligent strategy, you have to look at your finances from both sides. To make the right decisions about your taxes, your accountant needs information about your whole financial picture (both business & personal) as well as retirement savings strategies. We’ve yet to hear from a dentist that has had this in place in over a decade—are you in this boat?

This synergy will help you make more prudent decisions regarding hiring, purchases, handling of debt, changing fees – pretty much any decision that’s paralyzed you in the past. And putting these structures and systems in place will vastly reduce your chances of landing a $10,000+ tax bill at the end of 2015.
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Topics: dental tax, dental accounting, Tax Advisory

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

The 3 Pieces to Your Perfect Financial Plan

Posted by Jason Smith on Wed, Apr 30, 2014

When you graduated dental school and opened your own practice, you didn’t think it would be easy – obviously starting from scratch would be tough. But you weren’t prepared for just how tough it would be. You’re running a business, but you don’t have the tools you need to do it. You’re a dentist, not an accountant. And you didn’t get the business training that you need in your undergraduate or dental school curriculum. But you’re expected to have the skills of an entrepreneur and of a scientist. You’re lost.

What you need is a thorough and solid financial plan, which can guide you through the troubles of the present into the prosperity of the future. And that’s exactly what you’ll get from The 3 Pieces to Your Perfect Financial Plan. It’s Four Quadrants Advisory’s guide to getting the foundations of your finances in order, so you can concentrate on your patients rather than your balance sheets. Download it for free today and get started.

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Topics: dental advisor, dental tax, dental financial planning, dental accounting, Financial Planning, business of dentistry, Tax Advisory

Fee-only vs. Commission Investing: Which is Best?

Posted by Brogan Baxter on Fri, Apr 18, 2014

wallstreetIf you’re looking on advice for investing, and all you want is a few hot stock tips, you’ve come to the wrong place. What we will talk about is how to build a comprehensive investment plan that will build wealth in your dental practice and home accounts. There are two main things you need to keep in mind when building the framework of that plan.

The first is that you must do your best to invest in a fee-only environment, as opposed to one where your broker or manager is being paid on commission. The vast majority of people – up to 95% – use commissioned advisors. What’s the difference?

Look at the kinds of investments each type of advisor makes. A commissioned advisor will have you invest more in mutual funds that have commissions or “loads” attached to them. Do you have investments in mutual funds that end the description of the fund with “Class A”, “Class B”, or “Class C”? If so, you are in a commissioned investment. All make your advisor a commission in different places – class A will have a 3-5.75% charge at the front end, class B will have the same charge at the back end, and class C has a back end charge that’s a bit smaller. In other words, if you invest $100, only $95 will actually go into the market if it’s an A share. The rest goes to your advisor and the company they work for. And these fees pile up.

A fee-only advisor is much cheaper in the long run, and much of the time will also make you more money, since investment returns are eroded by these higher commissions. In a relationship like this the advisor is paid only on the value of your accounts rather than by the transaction, meaning that there’s a much closer correlation between the performance of your investments and the amount that you’re paying your advisor.

That’s all important because of the second thing to keep in mind when building an investment strategy – minimizing cost is crucial. There are a lot of hidden costs associated with investing, especially for a commissioned advisor. Administration fees, management fees, 12b-1 fees, the commissions themselves – again, they all add up. Together, they could eat up 5-6% of your return. You have to look at the net returns to see if your investments are really earning you what you need them to earn.

A difference in rate of return of only 3% can change your final values by up to 16% over ten years. In 20 years, the difference grows to 41%. By boosting your rate of return only slightly you can earn nearly twice as much over two decades. That’s a lot of money.

Any book on investing will tell you that a fee-only advisor is the way to go as soon as possible. But most fee-only advisors will only work with accounts that are already over $500,000 or more. That’s why you need to get your practice and personal finances in order generally, so you can take advantage of this and other useful wealth-building strategies.

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Topics: Practice Transition, dental retirement, dental tax, dental financial planning, dental accounting, Financial Planning

INFOGRAPHIC: 4 Symptoms of a Sick Dental Practice

Posted by Jason Smith on Sun, Mar 30, 2014

You run a successful practice and you're making a good income - but you know things can be better. You've tried practice management and marketing with short-lived results. You're not willing to settle with the status quo, but you don't quite know where to look or what to do about them. You see the signs of problems under the surface, but you're out of ideas for how to deal with them.

Check out our new infographic, 4 Symptoms of a Sick Dental Practice, by clicking on the preview image below. It's designed to show you a few things that could be amiss in your practice's finances and help you determine whether the worries you have are minor - or the start to something serious.

FQA_Success_Kit_Infographic_Email_F

             view_the_infographicIEW THE INFOGRAPHIC
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Topics: dental advisor, Practice Transition, dental retirement, dental tax, dental financial planning, dental accounting, Financial Planning, business of dentistry, Tax Advisory

3 Things Every Dentist Needs to Keep Work Manageable

Posted by Brogan Baxter on Fri, Mar 7, 2014

clockA dentist is most productive and most profitable when they’re in the chair. But someone has to run the business side of the practice as well, and often that falls to the dentist. They’re out of their element, they’re not with patients, and they’re adding on more time spent at work – straining home and family life as well. But there’s a pretty simple solution – a team of three advisors to manage the various parts of the dental business.

A strong office manager

Your office manager is in charge of the day-to-day operations of the practice. That includes practice systems like collections, checkout, and patient communication – the manager ensures all parts of the process are running seamlessly, and improving them constantly. The manager also is in charge of human resources, dealing with internal staff issues like lateness, complaints about a specific employee from a patient, or in-fighting between staff members.

An excellent accountant

Your practice’s accounting needs to be in order, or else growth and success are impossible. There are two parts to an accountant’s duty:

  • The accountant needs to create and sustain a consistent income structure. The balance between income from the W-2 and income from distributions needs to be right. Take-home income has to be consistent and regular, to preserve a steady cash flow.
  • The accountant must be proactive when dealing with your tax responsibilities. The books should be looked at monthly. There should be regular contact between the dentist and accountant to review practice numbers and financial reports. Quarterly taxes should, based on all of that data, be handled actively rather than passively. If you’ve had a tax surprise in recent years, your accountant is not doing their job proactively.

An external CFO

Your practice’s chief financial officer has one primary duty – to monitor and manage your business and personal cash flow. Cash reserves can never drop too low, because that leaves your practice and home vulnerable to unexpected expenses. But you should never have too much cash, either – that’s money that isn’t working for you.

Debt plays a big role in healthy cash flow, and the CFO helps manage that as well. Existing debt is structured in such a way as to make the practice as strong as possible, and new debt is built into that structure so that it doesn’t weaken your financial foundations.

In terms of overall strategic planning, the CFO is an asset as well. When deciding whether to expand to another operatory, move locations, add or drop an insurance plan, hire or fire staff, give raises – the CFO helps pick the option and the timing that’s best for you. When these decisions are made hastily or without planning, they often go wrong, and if enough do, it can dramatically impact your finances.

The more these three work together, the better off your practice and home finances will be. The dentist will be spending more time in the chair, and less time worrying about finances. The practice’s resources will be allocated properly. And with reduced stress and more time available, the dentist will spend fewer evenings anxiously poring over QuickBooks and more with their family.

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Topics: dental advisor, dental tax, dental financial planning, dental accounting, Financial Planning, Tax Advisory

Is your dental practice ready for Four Quadrants Advisory?