Our focus in working with physicians is not on the “top line,” but the financial “bottom line” — how the practice produces wealth for the physician-owner. That is where we will focus this article — how to be more financially efficient and save tax-wise much of what may be lost reimbursement-wise. To keep this article manageable, we will focus on just two strategies:
1. Utilizing the ideal corporate structure; and
2. Maximizing tax-deductible benefits for the doctors in the practice.
The most important thing a physician reading this article can do is keep an open mind. Just because you have operated your practice a certain way for five, 10 or 20 years, you don’t have to keep doing the same thing. Changing just a few areas of your practice could be the easiest $10,000 to $100,000 you ever see.
Use the ideal corporate structure
Choosing the form and structure of one’s medical practice is an important decision and one that can have a direct impact on your financial efficiency and the state and federal taxes you will owe every April 15. Yet, our estimation, in examining over 1,000 medical practices of our clients, is that many doctors get it wrong. Here are a few ideas to consider when thinking about your present corporate structure:
You must avoid using a partnership or proprietorship
These entities are asset protection nightmares and can be tax traps for physicians. The good news is that doctors who run their practices as a partnership or proprietorship have a tremendous opportunity to make up some of their reimbursement losses through lower taxes.
If you use an S-corporation, don’t treat it like a C-corporation
We estimate that 60% to 70% of all medical practices are S-corporations. Unfortunately, many physicians do not take advantage of their S-corporation status by using inefficient compensation structures that completely erase the tax benefits of having the S in the first place. If your practice is an S-corporation, you also have an opportunity to make up some of your reimbursement losses through lower taxes.
Implement a C-corporation
Once upon a time, C-corporations were the most popular entity for U.S. medical practices. Today, fewer than 15% of medical practices operate as C-corporations. Why? We believe it is because most doctors, bookkeepers and accountants focus on avoiding the corporate plus individual “double tax” problem.
While this is crucial to the proper use of a C-corporation, it is only one of a number of important considerations a doctor must make when choosing the proper entity. A common mistake is to overlook the tax-deductible benefit plans that are only available to C-corporations.
If you have not recently examined the potential tax benefits you would receive by converting your practice to a C-corporation, we recommend that you do so. This alone could counteract many of the proposed reimbursement cuts.
Use multiple entities
Very few medical practices use more than one entity for the operation of the practice. Successful practices can often benefit from a superior practice structure that includes both a S- and a C-corporation. These benefits are tax reduction and asset protection. If you have not explored the benefits of using both an S- and C-corporation to get the best of both worlds in planning, now is the time to do so.
Maximizing tax-deductible benefits
If you are serious about combating the reimbursement cuts, efficient benefit planning must be a focus. Benefit planning can definitely help you reduce taxes, but that is not enough. Benefits plans that deliver a disproportionate amount of the benefits to employees can be deductible to the practice, but too costly for the doctor owners. These plans can be considered inefficient. To create an efficient benefit plan, doctors need to combine qualified retirement plans (QRPs), non-qualified plans and “hybrid plans.”
Nearly 95% of the physicians who have contacted us over the years have some type of QRP in place. These include 401(k)s, profit-sharing plans, money purchase plans, defined benefit plans, 403(b)s, SEP or SIMPLE IRAs, and other variations. This is positive, as contributions to these plans are typically 100% tax deductible and the funds in these plans are afforded excellent asset protection. However, there are two problems with this approach: many QRPs are outdated and QRPs are only one piece of puzzle.
First, most physicians have not examined their QRPs in the last few years. The Pension Protection Act recently improved the QRP options for many doctors. In other words, many doctors may be using an outdated plan and forgoing further contributions and deductions allowed under the most recent rule changes. By maximizing your QRP under the new rules, you could increase your deductions significantly for 2011.
Second, the vast majority of physicians begins and ends retirement planning with QRPs. Most have not analyzed, let alone implemented, any other type of benefit plan. Have you explored fringe benefit plans, non-qualified plans or “hybrid plans” in the last two years? The unfortunate truth for many doctors is that they are unaware of plans that enjoy favorable short-term and long-term tax treatment. If you have not yet analyzed all options for your practice, we highly encourage you to do so.
Nearly every one reading this article will see reimbursements cut. We hope this motivates you to make tax and efficiency planning a priority.
David Mandell, JD, MBA is an attorney, author of 5 books for doctors, and principal of the financial consulting firm OJM Group, where Carole Foos, CPA works as a CPA and tax consultant. They can be reached at Mandell@ojmgroup.com. For a free (plus $5 S&H) copy of For Doctors Only: A Guide to Working Less and Building More, please call (877) 656-4362.
This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment, legal or tax advice. There is no guarantee that the views and opinions expressed in this article will come to pass or be appropriate for your particular circumstances. U.S tax and state corporate law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax, employee benefit and legal advice before implementing any strategy discussed herein. For additional information about the OJM Group, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein.