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What would be the best set up for private practice to minimize tax burden?

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  • Avatar livefree00 
    Participant
    Status: Physician
    Posts: 19
    Joined: 06/08/2018

    Hi,

    I welcome your advises on this.  CPAs/accountants on this site are also welcome to throw your input.

    I set up a PLLC for single specialty independent group contracted with multiple hospitals for inpatient coverage.  Currently I am solo and focus on inpatient service only.  In the next 6-12 months, I hope to add 1 or more associates to initiate clinic side.  With me alone, the expected revenue from inpatient works in the next 12 months is roughly $1 million.  I do not have kids nor house yet and I do not need any rental office for this inpatient work.  In the next 2 years, there will be a certainty of growth if I can find 3-4 associates to join me as bigger contracts from hospitals are coming.  Given this situation, what would be the best set up for this PLLC to minimize the tax burden and maximize my take-home income and retirement funds as CEO/Founder?

    I have met with a CPA/accountant who focuses on tax savings for small businesses like me.  I proposed the typical S-Corp set up where I am the employee as well as the owner/shareholder.  My cousin who owns several clinics with a partner suggested this S-corp, and I was thinking of getting a smaller salary as an employee while taking bigger pay as profit sharing/dividend to lower the tax.  This accountant is saying that may not be the best set up for me.  He will be giving me “better options” in about a week. He also said the IRS will audit me if I make my “salary” disproportionately low in comparison to typical salary for similar work just to minimize my W2 tax.  While I wait for his ideas, I wanted to ask here what your experiences or insights are for my situation.  Greatly appreciate it in advance.

    Livefree00

    #219588 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    Do you anticipate adding more docs as employees only, or as owners?

    Does the business have significant expenses that will come off the $1M revenue?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #219599 Reply
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    Avatar livefree00 
    Participant
    Status: Physician
    Posts: 19
    Joined: 06/08/2018

    Thank you for asking.

    I hope to add more associates if I can find them since there are more than enough works.  And if they are good, I will offer shareholding option after 2 years while I retain greater voting right to ensure the stability of the business for at least 4-5 years.  Too many small groups break up due to disagreements among partners.

    As to expense, with me being the only worker and no need of an office there is really no significant expense other than few laptops and a safe car to drive fast between 3 hospitals.  I will be paying a book keeper (a family member).

    Livefree00

    #219633 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
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    Joined: 01/09/2016

    Sounds like a great opportunity you’ve gotten into. Taking a week to come up with “better options” is, quite frankly, mystifying to me – is he researching on Google? As someone who focuses on tax savings for small business, seems like he would deal with this situation all the time.

    Given what you’ve said, S-corp with a written accountable plan for expense reimbursement (home office, mileage).

    Highly unlikely the IRS will audit you, even if your salary is disproportionately low, but that doesn’t mean I would recommend disproportionately low salary, just saying he is wrong.

    What are his qualifications again?

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #219635 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    well there’s no magic, if you’re making that much money you’re going to be paying a lot in taxes no matter what you do. You’ll be in the top marginal income tax bracket, top capital gains bracket, beyond child tax credit phaseouts, beyond QBI deduction phaseout, above NIIT level. Even with a 401k and defined benefit plan assuming you’re young. It sounds like the CPA is reasonable to me, you should wait to see what they come up with.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #219637 Reply
    hatton1 hatton1 
    Participant
    Status: Physician
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    Joined: 01/11/2016

    Aren’t you forgetting malpractice, health insurance, licensing……

    #219639 Reply
    Avatar livefree00 
    Participant
    Status: Physician
    Posts: 19
    Joined: 06/08/2018
    medical school scholarship sponsor

    Yes, those typical things for licensing, insurances, permits, attorney fees, CPA fees, interview expenses are assumed.

     

    So, S-corp would be the best as I initially thought?

     

    In defense of that CPA/Accountant, he has some backed up tax files to finish for few days. Thus the 1 week period. He said he has 4-5 different set up scenarios and will propose 2 best ones.

    #219642 Reply
    Avatar livefree00 
    Participant
    Status: Physician
    Posts: 19
    Joined: 06/08/2018

    I just noticed that this accountant is also an IRS “enrolled agent.” Maybe this is why he said I would be noted by IRS and be audited right away if I lower my salary portion? Does his role as an IRS agent makes him less favorable to my cause? Or does it not matter or makes him better for my tax savings?

     

    Another question: some are advising to never use any of my own savings to start and run a business and instead to use bank loans which can also include my own salary for the first 1-3 months while waiting for the reimbursement to start to come in from payors.  The rationale for this is even if my business go down, my savings would be protected. This accountant is saying that is not smart since I have to pay the interest to bank.  I see merits in both argument.  What is your view or experience?

    #219838 Reply
    jfoxcpacfp jfoxcpacfp 
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    Status: Financial Advisor, Accountant, Small Business Owner
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    Joined: 01/09/2016

    I just noticed that this accountant is also an IRS “enrolled agent.” Maybe this is why he said I would be noted by IRS and be audited right away if I lower my salary portion? Does his role as an IRS agent makes him less favorable to my cause? Or does it not matter or makes him better for my tax savings?

    Click to expand…

    He is not an IRS “agent”. An Enrolled Agent has studied and taken exams to be proficient at tax preparation and advice. That means he is allowed to represent clients before the IRS, same as CPA’s and attorneys. There are many EA’s who I would consider just as good or better than CPA’s for tax planning and preparation. EA’s typically work alone in single-owner practices.

    All that said, an EA serves a very narrow niche: taxes. Experience in other areas, such as business planning and advice, is typically learned as they go along and not within the context of an office setting working under experienced advisors. In general, I believe this is the big differentiation between the skill set of EA’s and CPA’s. This is just a general observation. You might want to ask your advisor how many s-corp audits he has observed in this area. I have yet to see one in 40 years and I have seen some pretty blatant flaunting of the requirement that salaries be appropriate.

    On a side note, many CFP’s have chosen to get their EA to deepen their tax knowledge as it is more pertinent to planning than the more rounded CPA license (and takes only 6 mos or so). CFP’s don’t need to learn auditing and accounting theory, for example.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #219886 Reply
    Liked by livefree00
    Avatar livefree00 
    Participant
    Status: Physician
    Posts: 19
    Joined: 06/08/2018

    Thank you very much for the great information, Johanna. He is both CPA and EA.  Do you serve only those in your state?

    I will let you know what he proposes and the fees he charges.  I must be able to compare him with other accountants to make sure he really is good.

    Anyone has any comment on using business capital loan vs using my own savings for the first 2-3 months to pay for my own salary and few computer equipment (about $5000) and a strong company car like Volvo to drive between 3 hospitals almost daily.

     

    #219902 Reply
    Avatar DCdoc 
    Participant
    Status: Physician
    Posts: 446
    Joined: 06/14/2016

    Can we guess the specialty? I assume psych.

    #219906 Reply
    Avatar livefree00 
    Participant
    Status: Physician
    Posts: 19
    Joined: 06/08/2018

    Sure.  I will let you play the guessing game.

    For now, psych is a wrong guess.

    #219908 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7523
    Joined: 01/09/2016

    Thank you very much for the great information, Johanna. He is both CPA and EA.  Do you serve only those in your state?

    I will let you know what he proposes and the fees he charges.  I must be able to compare him with other accountants to make sure he really is good.

    Anyone has any comment on using business capital loan vs using my own savings for the first 2-3 months to pay for my own salary and few computer equipment (about $5000) and a strong company car like Volvo to drive between 3 hospitals almost daily.

    Click to expand…

    You’re welcome – that is very interesting! He must have gotten the EA first and then went on to get the CPA.

    Not sure what your question about serving those in my state refers to, can you clarify?

    Recommendation on the business capital loan versus your own savings depends on the amount of savings, goals, int rate on loan, etc. Too many variables here.

    I guess teleradiologist.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #219910 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7523
    Joined: 01/09/2016
    I guess teleradiologist.

    Click to expand…

    Whoops, change that guess – forgot about the driving. Radiologist, though.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #219911 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    OP your focus is on the tax which is certainly a consideration but you really need to consider some broader aspects of group and practice structure. For instance if you envisioned a future eat what you kill model with additional owners then a partnership has more flexibility in allocation. An S Corp can have conflicts where different shareholders work different amounts as distributions always must be proportional to ownership and therefore sometimes you get into a least common denominator situation where people working more and getting allocated a larger slice of the overall pie are forced to take a higher salary than ideal because there’s no room to drive distributions up because someone working less can’t take less salary. Make sense? You need to think far down the road about ultimate group composition and not just about what makes the most sense right now.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #219916 Reply

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