Medical practices face unique challenges when it comes to taxes. For this reason, PYA Principal Greg Gates has compiled guidance to educate physicians on practical income tax issues. He recently presented “Common Tax Problems in Running a Physician Practice” at the 2013 AICPA Healthcare Industry Conference.

1. Common Tax Problems in
Running a Physician Practice
AICPA Healthcare Conference
November 14, 2013
Presented by Greg B. Gates, CPA, JD
Principal PYA GatesMoore
Atlanta, GA
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2. Greg holds a BS in Business Administration from Colorado State University and a Juris
Doctorate from the Marshall-Wythe School of Law, College of William and Mary. Prior to cofounding GatesMoore in 1982, Greg worked as a tax specialist with a Big 4 accounting firm
and was Vice President of a national practice management consulting firm. As a Certified
Public Accountant, he specializes in tax law and in the area of physician "buy-ins,"
compensation arrangements, practice mergers, practice valuations, strategic planning, and
retirement plan design and compliance. Greg is a frequent speaker for various medical
societies. He is a member of the Georgia Bar Association, the Georgia Society of Certified
Public Accountants, and the American Institute of CPAs. Greg served as an adjunct faculty
member of The Kennesaw State University Physician’s MBA program while teaching a course
in medical practice valuation.
Greg was named by Atlanta Magazine (for the sixth consecutive year) as one of Atlanta's
2013 FIVE STAR Wealth Managers, in the category of Taxation.
GatesMoore merged with Pershing, Yoakley & Associates on January 1, 2012.
ggates@pyagatesmoore.com
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3. Income Tax Trivia
1.
2.
3.
4.
5.
In what year was the first U.S. income tax
imposed?
What was the tax rate?
Which constitutional amendment allows
Congress to levy an income tax?
What was the due date of individual income tax
returns?
Who was the only U.S. President that visited
“the” IRS office building while in office?
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4. Common Tax Problems
Educating Physicians about “Phantom Income”
Reasonable Compensation/Justification for Dividend
Payments
S Corporation Conversions
Automobiles
Owner-Occupied Lease Arrangements
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5. Year End Tax Projection
“Common Scenario”
Projected at Year End
Payment of Bonuses
Cash Balance
Taxable Income
Cash
$100,000
<100,000>
$
0
Taxable Income
$200,000
<100,000>
$100,000
Doctor’s Question: “How can this happen?”
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6. Explanation
Three Types of Expenses
Operating Expenses
Timing Differences
Permanent Differences
•
•
•
•
•
50% of meals & entertainment
Officers life insurance premiums
Treasury stock purchases
Federal income taxes paid (C Corporation)
Etc.
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7. Operating Expenses
Cash
Tax
$10,000
$10,000
salaries, supplies, etc.)
(10,000)
(10,000)
Cash Balance
$
Collections
Operating Expenses
(e.g. office rent, staff
Taxable Income
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0
$
0
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8. Timing Differences (pay cash for fixed assets)
Tax
Years 2-5
Cash
Tax
Collections
$50,000
$50,000
Equipment Purchase/Depreciation*
(50,000)
(10,000)
(40,000)
Cash Balance/Taxable Income
$
$40,000
$(40,000)
-
$
-
*Computed on a straight line basis without regard to Section 179 for illustration
Timing Differences (borrow for operating expenses)
Cash
Loan Proceeds/Collections
$90,000
Pay Expenses/Loan Payoff
(90,000)
(90,000)
Cash Balance/Taxable Income
$
$(90,000)
-
Tax
Tax
Years 2-5
$
-
(assumes a 5 year loan with equal principal payments)
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$90,000
$90,000

9. Permanent Differences
Cash
Tax
Permanent Differences*
Collections
$10,000
$10,000
Meals & Entertainment (50%)
(10,000)
(5,000)
Cash Balance/Taxable Income
$
0
$ 5,000
*Permanent differences include such expenses as penalties, 50% of
meals and entertainment, officers life insurance, federal income
taxes, gifts in excess of $25 per donee, club dues, Treasury
Stock, etc.
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10. American Institute of CPAs
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11. C Corporations
Deferred Income Tax Liability
Illustration
Net income at October 31
Cash & other Current Assets
Net Book Value of Fixed Assets
Liabilities
Current Year “M-1’s”
NOL Carryforward
Deferred Income
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$ 900,000
<1,030,000>
< 160,000>
340,000
20,000
0
$ 70,000
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12. Taxable Income to Reflect
Eliminate Deferred Income
$107,692
Proof:
Taxable Income
Federal Income Tax Rate
Tax
$107,692
35%
$ 37,692
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13. Solution
Just pay the tax!
“Three Year” Plan
Annual Payment Thereafter
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14. Agreements
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15. Shareholder Agreements
Practice Valuation formula should include deferred
income tax liability* as an “offset to value”
Buy In
Be aware of a deferred income tax liability* if a
doctor is buying into a practice
*Or Deferred income in a flow through entity
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16. S Corporations
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17. S Corporation
Doctors “Remuneration” Paid by
• Salary
• Dividends
Issue of “Reasonable Compensation”
Justification of Dividends
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18. “Chicken or the Egg”
Does the IRS concern itself with the amount of
dividends if they deem compensation to be
reasonable?
OR
If you can justify the dividends paid, does the level
of compensation matter?
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19. Involve clients in the discussion of reasonable
compensation:
e.g.
•
•
Neurosurgery Group
Cardiology Group
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20. Distribution V. Wages/Salary
IRS REQUIREMENT:
“Distributions and other payments by an S corporation
to a corporate officer must be treated as wages to the
extent the amounts are reasonable compensation for
services rendered to the corporation.”
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21. IRS Guidelines
IRS Definition of Reasonable Compensation:
“Reasonable compensation is the value that would
ordinarily be paid for like services by like enterprises
under like circumstances.”
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22. IRS Guidelines
Notice of Acceptance as an S Corporation
We would also like to take this opportunity to inform you of your tax obligations
related to the payment of compensation to shareholder-employees of S
Corporations.
When a shareholder-employee of an S Corporation provides services to the S
Corporation, reasonable compensation generally needs to be paid. This
compensation is subject to employment taxes.
Tax practitioners and subchapter S shareholders need to be aware that
Revenue Ruling 74-44 states that the Internal Revenue Service (IRS) will recharacterize small business corporation dividends paid to shareholders as
salary when such dividends are paid to the shareholders in lieu of reasonable
compensation for services.
This position has been supported in several recent court decisions.
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23. Services of Shareholder
9 Factors (Fact Sheet 2008-25, August 2008)
1. Training and experience
2. Duties and responsibilities
3. Time and effort devoted to the business
4. What comparable businesses pay for similar service
(US Bureau of Labor Statistics)
5. The use of a formula to determine compensation
6. Payments to non-shareholder employees
7. Dividend history
8. Timing and manner of paying bonuses to key people
9. Compensation agreements
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24. Dividends are distributions of Practice profit
from:
Return on Capital Investment
Profit from employment of non-shareholder
physicians and mid-level providers
Profit from Ancillary Services
(e.g. “nuclear” services, labs, x-ray, CT, MRI, etc.)
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25. Illustration of Cardiology Practice
Salary
Dividends
Total
Doctor A
$587,000
$550,000
$1,137,000
B
372,000
550,000
922,000
C
374,000
550,000
924,000
D
490,000
550,000
1,040,000
E
351,000
550,000
901,000
Total
$2,174,000
$2,750,000
$4,924,000
%
Average
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44%
$434,800
56%
100%
$550,000
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$984,800

26. “Reasonable Salaries”
75th Percentile 90th Percentile
Sullivan Cotter and Associates, Inc.(rounded)
Median
General Cardiology -National
300,000
375,000
Invasive-Interventional - Southeastern
433,000
540,000
Invasive-Noninterventional
397,000
628,000
703,000
General Cardiology
367,000
492,000
613,000
Invasive-Interventional
486,000
665,000
844,000
Invasive-Noninterventional
431,000
537,000
691,000
523,000
ID*
Medical Group Management Assoc. (rounded)
* ID = insufficient data
Determination of “Technical Profits” = $2,925,000
Dividends
2,750,000
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27. Compensation Benchmarks:
Department of Labor Bureau of Labor Statistics
Versus Common Industry Benchmarks
Specialty
and %
DOL
$137,310
Internal
Medicine:
25%
OBGYN : 25% $165,830
$154,650
Pediatrician:
50%
Not
SurgeonGeneral: 25% reported (1)
MGMA
AMGA
Sullivan Towers
Cotter Watson
178,146
192,866
170,700
157,800
247,815
259,020
220,000
250,000
216,112
222,827
191,535
170,000
$303,626
317,156
277,126
312,500
•This wage is equal to or greater than $187,199 per year.
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28. Conclusions
How to support your Reasonable Compensation Figure
Develop a consistent year-to-year Reasonable
Compensation
Determine your Reasonable Compensation figure
using the IRS guidelines and the 9 factors handed
down by the courts
Add to your Reasonable Compensation
documentation, reasoning, and notes to your
corporate minutes
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29. S Corporation Conversions
2013 Imposition Of Additional .9% Medicare
FICA On Those “Earning” More Than
$250,000
Illustrations of Built In Gains & Losses
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30. S Corporation Client Conversations
One group did not convert due to C
Corporation disability insurance premiums
One group did not convert due to C
Corporation long term care insurance
premiums
But, both groups were very appreciative of the
analysis!
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31. S Corporation Conversions
Basis
704,825
Cash
Due From Affiliates
Due From Officers
Furniture, Fixtures & Equipment*
Accounts Receivables*
Supplies
Liabilities
Estimated Built In Gains
Fair Market
Value
704,825
Total
BIG
-
Ist Year
BIG
-
-
-
187,549
187,549
350,023
1,189,021
838,998
(14,811)
1,227,586
748,948
32,086
(14,811)
2,847,618
748,948
32,086
1,620,032
748,948
32,086
781,034
(100,000)
(100,000)
Accounts Payable (to include accrured wages, if any)
Built In Gain (Or Built in Loss needed)
-
$ 1,520,032
Cash available with suspension of shareholder wages (Jan 1 - Mar 15, 2013)
Additional Bonus Needed (or "Cushion" in BIG Calculation)
$
(980,127)
681,034
(581,034)
$
539,905
$
100,000
Round To:
$
540,000
$
540,000
Gross Wage
Taxes (at 40%)(Estimate)
Loans Payable to Doctors
Net Checks
$
540,000
(216,000)
$
$
324,000
540,000
(216,000)
(324,000)
-
OR
$
Board Resolution is needed to a) declare the built-in gains bonus, and b) to suspend shareholder wages
until the built-in gain bonus is paid.
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32. Automobiles
Holy Grail = Corporate Car
Typical Problems
 Purchase made in or lease executed in the doctor’s personal
name, yet the note or lease payment is paid through the practice
 Documentation of Business Use %
 Definition/Understanding Business Use
 Failure to add personal use % to W-2
 Disallowance of expenses on audit (Payback Provision)
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33. Solutions
As always, the solutions are education and
communication
Assign the lease to the corporation (with lessor’s
consent)
Forward worksheet/correspondence for completion
of W-2 addition
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34. Ultimate Solution
(Group Practice)
No corporate cars
Discuss liability issues
Practice can reimburse doctors for business use
percentage of automobile expenses
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35. Owner Occupied Lease Arrangements
Typical Scenario – Doctor (or a group of doctors)
owns his medical office building as a single member
LLC and leases to his practice
Practice is structured as:
• LLC
• S Corporation
• C Corporation
• Sole Proprietorship
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36. Facts/Results
1. Rental Activity Reflects a Profit
•
•
•
General Rule: all “real estate” is passive
Under NOPA rules this profit cannot be used to offset losses
from other passive activities
Worst of both worlds
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37. Facts/Results
2. Rental Activity Reflects a Loss
Question:
Answer:
Can the loss be used?
It depends.
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38. Facts/Results
If,
a) the real estate activity is owned in the same %s as
the medical practice, and
b) the practice is a C Corporation
Then NO, the loss may not be used (suspended and
used consistent with suspended losses).
Bad result = NOPA rules
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39. Facts/Results
If,
a) the practice is a flow through entity, and
b) if, an election is made (for the first year of the
activities) to aggregate the activities,
Then YES, the loss may be used as an offset against
practice income.
Particularly helped if the real estate entity had a cost
segregation study performed.
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