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

How To Be Sure You Avoid Tax Surprises

Posted by Brogan Baxter on Fri, Feb 7, 2014

screamIf you’re already tight on cash, the last thing you want 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. It may seem like an inevitability if you’ve been hit again and again with tax surprises, but it doesn’t have to be – with the right planning, your practice can be safe.

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 be right. Establish an S-corporation, not a sole proprietorship. 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.

Put the proper systems in place

Once your foundation is sound, you can build processes on top of it to further enhance your protection against tax issues. First you need a system to forecast financial expectations for the practice. The forecast should be centered 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 if you expect to grow from more efficient scheduling, plan for that in your tax payments.

Your system for accounting must be proactive, not reactive. Reconciliations should be done monthly by your accountant, with the smallest number possible of uncertain or uncategorized transactions. Regular tax estimates should be provided, based on changes in things like the financial forecast and the practice’s overhead. And there has to be thought behind large expenditures, like new equipment and new hires. A purchase can be written off from that year’s taxes, but we’ve seen practices that forget they did that in one year and not compensate for it appropriately, then suffer a tax surprise of up to $60,000 unexpectedly.

Finally, your business management and accounting advice need to have cohesion. In a vacuum, neither side 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.

This synergy will help you make more prudent decisions regarding hiring, purchases, your 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 $75,000 tax bill at the end of the year.

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Topics: dental tax, dental accounting, Tax Advisory

3 Corporate Structures Explained - and the One That's Right for Your Practice

Posted by Brogan Baxter on Fri, Jan 17, 2014

paycheckWhen forming a business, there are important decisions that have to be made, decisions that will end up impacting you for years to come. If you’re starting a new dental practice, one such decision is the corporate structure. Should you start an S-corporation? A sole proprietorship? The chances are good that you won’t know the answer. In fact, you probably won’t even know the options. There are three primary structures that most dental practices look at.

The C-corporation

To be blunt, do not start a C-corp, unless you’re reading this blog in 1986. Decades ago there were tax loopholes that made C-corps beneficial to dentists. Those loopholes are now closed, and the corporate structure that was so popular in the 1980s has now basically died out. There’s no benefit to a C-corp today.

The sole proprietorship

If you’re an accountant, you likely see the sole proprietorship as the simplest choice. Unlike some other options, there’s only one source of taxed income, which means only one tax return. That’s good news for an accountant.

But for a dentist, it’s bad news. Why is that? A sole proprietorship doesn’t allow for you to be paid in W-2 income. That’s the kind of paycheck you might give your employees, one where state and federal taxes are automatically withheld. Instead, all of your income comes from “distributions,” which are basically payments the business makes to the proprietor when deemed necessary. That can lead to problems.

Read the Guide: Financial Planning for Dentists

One is that if things aren’t going well, a dentist may not feel that he can afford to pay himself. That leads to dentists taking big chunks of money at irregular intervals, and possibly going months without getting paid. That’s really bad for home cash flow and causes a lot of stress around the house. Additionally, the fact that no taxes are withheld can hurt practice cash flow. Instead of paying a little every two weeks or so, a sole proprietor pays taxes all at once or on a quarterly basis. It’s extremely hard to plan for.

If there’s as little as a 3-4% change in income or overhead, the tax owed can change drastically. Quarterly payment figures change rapidly and erratically, and if you (and your accountant) are not on top of it tax costs can balloon, up to $80,000 more than you expected.

The S-corporation

In the long run, this is the better choice for the dentist. In an S-corp, you still have the ability to take some of your income in the form of distributions, and that money is taxed the same as in a sole proprietorship. But you also take a frequent paycheck like a regular employee, and taxes can be withheld from that normally. It also gives the ability to invest in a 401k, rather than being restricted to a Simple IRA.

All of this builds a base level of stability in your practice. Rather than 100% of your income fluctuating with changes in your practice, only a fraction of that volatility crosses over into your home. Rather than your whole tax bill being uncertain, only a fraction is paid on a quarterly basis, and the same amounts of fluctuation in income or overhead have less of an effect.

On the other hand, an S-corporation does have one negative that the sole proprietorship lacks. An S-corp must suspend any losses for tax consideration until profits are recorded. The tax floor for an S-corp is $0; a sole proprietor has none. That means that if you have $80k in income but a $10k loss on the practice, an S-corp would be taxed for the full $80k where the sole proprietorship would be taxed only for the net of $70k. That money comes back later, but when you’re first starting out, sometimes that’s not what you want.

But overall, Four Quadrants tends to advise our clients to form S-corporations. The benefits of stability in cash flow and home income outweigh any concerns about covering losses. And stability is a crucial part of the health of your finances, in the practice and at home.

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