January 2012, Volume 8, Issue 1
Published by AEGIS Communications
Enhancing a Dental Practice
Using tax incentives and financial advice properly relies on trusting the right advisors.
Building a dental practice takes patience, hard work, and attention to the nuances of the changes that are needed to guarantee practice enhancement. New technology, upgrading equipment, and expert advisory services keep the dental practice moving in the right direction for growth in practice revenue and profit. The consistent monitoring of the practice by the owner allows it to increase in value because it stays at a proper state-of-the-art level, compared to other practices in the same geographic area where the practice is located. An owner with good attention to detail and good management skills can ensure that his or her practice will be ahead of the competition. There are other points to consider when striving for the improvement of a dental practice that assist greatly in increasing practice profitability and value. Dentists who ignore or pay little attention to cash flow, tax incentives, and advisory services that add value to the practice are missing important ingredients of practice enrichment.
What Tax Incentives Are Available?
Increasing the profitability and value of a dental practice by using tax incentives requires the retention of sophisticated advisors who have extensive experience working with dentists. There are specific points involving dentistry that are unlike any other business. It is important to check the advisor’s resume before retaining that firm to make sure that it has the background to aid the dentist in building his or her practice. Typically a CPA is the first choice in advisory services for the dental practice because of the CPA’s knowledge in assisting in the increase of cash flow awareness, money, business management skills, and understanding the tax code. CPAs with experience in working with dentists know about financing techniques for maximum cash flow opportunities involving equipment acquisitions, real estate purchasing, and the use of retirement programs that dental practices use for their own growth. The CPA with dental practice experience knows what type of retirement plan fits the needs of the dental practice, and allows the owner and principals to enjoy current income tax savings as well as encourages the ability to build a retirement nest egg, which is so difficult to do if taxes must be paid before the deposit of the profits. The design of an employer-sponsored qualified retirement plan is also an incentive that is used to attract and retain more highly qualified personnel than the competition, which enhances the infrastructure of the dental practice and allows it to continue its growth. The knowledge of the owner and dental practice’s assets and liabilities allow the CPA to merge the best approach for the dentist in accumulating net worth so that there is a good overall picture of what is available to permit a smooth transition with the best tax outcome for the owner and the practice.
Business Management/Tax Incentive Tool
One of the most widely misunderstood concepts in organizing or reorganizing a dental practice is the type of business structure that should be used for it. There are many formats that can be used that supply a substantial opportunity for tax savings and, therefore, increased cash flow to the dental practice and to the dentist. A CPA with experience can help the dentist decide which is best. S corporations, C corporations, LLCs and LLPs, proprietorships, or a mixture of two or more of these forms of organizations can mean thousands of dollars in savings for the dentist.
Here is an example of how the proper entity can produce cash flow for the practice and increase its value. A dental practice that may be acquiring equipment and may need borrowed funds to do so may find that the use of an S corporation has certain limitations when attempting to create a tax loss from depreciation expense that is allowed as a tax write-off. The S corporation needs “basis” (the positive capital account of the dentist/owner) to enable the loss from depreciation to flow from it to the owner. Loans from a lender, other than the owner of the shares of the S corporation to it, do not count towards the basis, so a loss in the S corporation does not flow through to the dentist; it must remain in the corporation until there is basis in it. Any loss would be denied to the owner and any tax refund or reduction in amount due for taxes would have to wait for the basis to occur. The owner of an LLC or an LLP with the same set of circumstances, where borrowing was needed to acquire the equipment, will be able to count the loan as basis and will be able to write off the depreciation and have the loss flow through to the personal tax return of the owner. In these cases, the tax refund will be available to the owner of the LLC or the LLP. Those without experience working with dentists may make the mistake of not knowing the needs of the dentist and the large amounts of expenditures each year for equipment. This mistake can cost the dentist an enormous amount of money because of the inability to recoup or to not pay current income taxes.
Equipment Financing Options
Another critical area for advisors to have experience in increasing practice value and income is having knowledge of the financing options that are available to the dentist when acquiring equipment. Advisors with little experience working with dentists will assume that the local bank is available for financing any type of equipment and do not understand the percentages of down payment or the lack of need for down payment for those acquisitions. The value of the equipment and the financing opportunities of those with knowledge of the dental profession are important factors for determining where to go for the financing, what percentage of the cost can be borrowed, and how to negotiate rates and terms. This may sound simple to advisors who are unaware of the opportunities in the marketplace and how good advice can increase the cash flow, profitability, and value of the dental practice. Those who know will understand where the best rates and terms are available. Those who know how to advise the dentist on how to allow the practice to achieve the most benefits will be the ones who can best leverage cash flow, tax implications, and up-to-date technology.
Get the Best Advice Available
To increase your dental practice’s profitability and value, find the CPA with experience in working with dentists. Your dental supply house, professional dental journal articles, and your attorney are good sources of referral. The CPA’s resume is a must-read before making the important decision about who to rely on for financial advice and tax-motivated incentives to help your practice grow.
About the Author
Bruce Bryen, CPA | Mr. Bryen is the Managing Partner in the firm of Bryen & Bryen, LLP, Certified Public Accountants, in Marlton, New Jersey. Mr. Bryen specializes in deferred compensation such as retirement plans, income and estate tax planning, determination of proper organizational format, asset protection, and structuring loan packages for presentation to financial institutions. He is also experienced in providing litigation support services and has testified on numerous occasions as an expert witness. He can be reached at 856-985-8550, ext. 112.