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

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.

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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

Reducing the Risks of a Partnership Failing: Part 2

Posted by Brogan Baxter on Sun, Mar 16, 2014

handshakeLast week I talked about the preparation that needs to be done before hiring an associate to make sure your partnership works out. After all, 75% of them end up failing, so it looks like dentists need some help. Once you’ve made the hire, though, the work isn’t over. You need to plan for what happens after the hire is made and the buy-in is triggered, and you need a plan for what happens when you’re ready to call it a career.

You’ll be coexisting with your new partner hopefully for several years at least, before you ride off into the sunset. Your practice will not function in the same way it did when you were the only executive in charge. You’ll have to work together to make things work. Communication is key, and regular management meetings are a necessity.

Decisions must be made about how decisions will be made when you’re working as partners. How will you develop strategy as a team? Who decides when new equipment is needed, what equipment you should buy, and how? What will your schedules be – will you work together, or trade off shifts? What happens if one of you wants to run a personal expense through the practice but the other partner does not? You need answers to these questions before the situations come up.

Another thing that’s helpful is finding a new corporate accountant. This should be someone who hasn’t worked with either you or your new associate before – any accountant who’s associated with either of you might have more loyalty to one than to the other, and because of that, one of you will be favored. That’s a bad way to start out a partnership.

And since that partnership won’t last forever, you need to plan for how you’ll dissolve it once you’re ready to retire. Phasing out slowly is the best option for all involved – it helps your long-time patients get comfortable with your partner and with the idea of you leaving, your partner gets to ease into being totally in charge, and you don’t have to give up working all at once.

Any plan should be focused on making sure that you don’t have to stop working before you’re ready. You created this practice and it’s your life’s work – it’s yours as long as you want it, and as long as you’re an asset rather than a liability. But at some point, your 50% stake will need to be passed on to your associate. The deal should be fair and also flexible. It benefits all parties involved.

Whatever happens, don’t fall into the trap of thinking there’s one right answer that works for everyone. The only right transition is a custom transition. Your situation is unique, and so is your associate’s. Your plan needs to reflect that, and serve the unique individual needs that each of you have.

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Topics: dental retirement, dental 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

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