By Carole C. Foos, CPA & David B. Mandell, JD, MBA
Most executives, medical providers and owners of ASCs strive to achieve two goals in their center – to “do good,” by providing superior medical care; and to “do well” in terms of financial rewards. Unfortunately, as to the second goal, many such owners do not operate their business with optimal after-tax efficiency. In fact, we often see owners leaving tens of thousands of dollars “on the table” each year – which can equate to nearly $1 million of lost wealth over a career. The good news is that many of you reading this can likely improve your post-tax bottom line in a number of ways.
There is truly no better time than now over the last 30 years to focus on post-tax efficiency. As you likely know, when President Obama signed the Taxpayer Relief Act of 2012 in early January 2013, taxes increased on high-income taxpayers like many owners of ASCs and their physicians – in some cases, dramatically. While the details of the “fiscal cliff” deal is a topic for another article, the important take-aways are:
While the causes of “dollars left on the table” can range from wasteful overhead to unproductive employees, our expertise and focus is corporate structure, tax reduction and benefit planning. For this article, we will focus on 3 strategies for recapturing some of the funds left on the table:
The most important thing you can do is keep an open mind. Just because you have operated your center a certain way for 5, 10 or 20 years, you don’t have to keep doing the same thing. Changing just a few areas of your business could recover $10,000 to $100,000 of “lost dollars” annually. Let’s explore the 3 areas:
Choosing the form and structure of one’s business 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 from our experiences in examining over 1,000 businesses of our clients, most are not truly optimized. Here are a few ideas to consider when thinking about your present corporate structure:
A. You must avoid using a partnership, proprietorship, or “disregarded entity”: These entities are asset protection nightmares and can be tax traps as well. Nonetheless, we have seen very successful businesses operating as such. The good news is that ASCs which are operated as a partnership, proprietorship, or disregarded entity have a tremendous opportunity to find “dollars on the table” through lower taxes – especially on the 3.8% Medicare tax on income. This can be a $10,000-$30,000 per owner annual recovery.
B. If you use an “S” corporation, don’t treat it like a “C” corporation. Many ASCs operate as “S” corporations. Unfortunately, some do not take advantage of their “S” corporation status – using inefficient compensation structures that completely erase the tax benefits of having the “S” in the first place. If your business is an “S” corporation, you should maximize your Medicare tax savings through your compensation system in a reasonable way. This can be a $10,000-$30,000 per owner annual recovery for businesses not properly structured.
C. Implement a “C” corporation. Many ASCs avoid a “C” corporation entity. Why? We believe it is because bookkeepers and accountants often focus on avoiding the corporate and 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 an owner 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 business to a “C” corporation, we recommend that you do so. Utilizing benefit plans that only a “C” corporation can offer can create a $10,000-$30,000 per owner annual improvement.
D. Get the Best of Both Worlds – Use Multiple Entities. Very few ASCs use more than one entity for the operation of the business… and, if they do, it is simply to own real estate. While this tactic is also wise from an asset-protection perspective, its tax benefits are typically minimal, if any.
Successful ASCs can often benefit from a superior business structure that includes both an “S” and a “C” corporation. This can create both tax reduction and asset protection advantages. 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. Utilizing a two-entity structure properly can create a $10,000-$40,000 per owner annual improvement.
If you are serious about capturing “dollars left on the table,” tax efficient benefit planning must be a focus. Benefit planning can definitely help you reduce taxes, but that is not enough. Benefit plans that deliver a disproportionate amount of the benefits to employees can be deductible to the business, but too costly for the owners. These plans can be considered inefficient. To create an efficient benefit plan, the business should combine qualified retirement plans (QRPs), non-qualified plans and “hybrid plans.”
Nearly 95% of the clients 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, 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: i.) many QRPs are outdated; and ii.) QRPs are only one piece of puzzle.
First, most ASCs have not examined their QRPs in the last few years. The Pension Protection Act improved the QRP options for many businesses. In other words, many of you 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 for 2013 by tens of thousands of dollars annually, depending on your current plan.
Second, the vast majority of ASCs begin and end their 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” recently? The unfortunate truth for many owners is that they are unaware of plans that enjoy favorable short-term and long-term tax treatment. These can have annual tax advantages that vary widely ($0-$50,000 per owner) and also create significant long term tax value as well. If you have not yet analyzed all options for your business, we highly encourage you to do so.
For businesses with gross revenues over $3 million, a small captive insurance arrangement might be significant way to recapture “dollars left on the table.” Today, there are likely many risks in your business that are going uninsured – from excess product liability to employee claims to legislative risks. Like most businesses, you simply hope that these risks don’t come to fruition… and you will pay out if any do. As a result of your de facto “self-insurance,” you are not taking advantage of the risk management, profit-enhancing and tax reduction benefits that are available to you with a captive.
By creating your own captive insurance company (CIC), you can essentially create a pre-tax war chest to manage such risks. If structured properly, the CIC enjoys tremendous risk management, tax and asset protection benefits. The potential tax efficiency, in fact, can be in the hundreds of thousands of dollars annually. While an experienced law firm, captive management firm, and asset management firm are crucial, you as the captive owner can maintain control of the CIC throughout its life. It can then become a powerful wealth creation tool for retirement as well.
Nearly every one of you reading this article would like to be more tax efficient, especially with a new higher tax regime in place for 2013 and beyond. We hope these new tax rules motivate you to make tax and efficiency planning a priority, so you too can recapture the “dollars left on the table.”
David B. Mandell, JD, MBA, is an attorney and author of 10 books on legal, tax and financial issues, including “Wealth Secrets of the Affluent,” published by John Wiley & Sons, Inc., the largest business book publisher in the world. He is a principal of the financial consulting firm OJM Group (www.ojmgroup.com), where Carole C. Foos, CPA, works as a tax consultant. They can be reached at 877-656-4362 or email@example.com.
abeo Management Corporation (abeo) serves as a leading source of revenue cycle management and practice management with a specialization in anesthesia. The company leverages its people, processes, and software to serve independent practices, surgery centers, hospitals and healthcare systems with a scope of services that include billing, coding, transcription, practice management, and business consulting.