Guest Blog Post: J. Haden Werhan, CPA/PFS
Do you ever wake up at night worrying about your patients, wondering:
Are those temporaries OK?
Will the antibiotics calm that abscess?
Did you pull the wrong tooth? (Just kidding.)
After a long day, you wake up at 3:00 a.m., hoping your patients are sleeping soundly, even if you aren’t.
I too, sometimes find myself worrying about clients in the middle of the night or wee hours of the morning. While there are no comparable emergencies in accounting, there are numerous opportunities for dentists to face significant tax and financial dilemmas.
What follows are some of the dentist financial and tax issues I worry about most:
#1)Properly Managing Your Corporate Office
There are many benefits to establishing your practice as a corporation. First and foremost, it helps protect your professional assets from personal liabilities. There is also the convenience of drawing a salary and withholding taxes, which can reduce the burden of making quarterly estimated taxes.
But a properly managed corporation requires a fair amount of compliance and record-keeping. Corporations are separate and distinct entities from the dentist shareholder(s) who own them. You must follow several formal procedures accordingly.
I worry when procedures slip.
I worry that dentists may use their corporations as personal checkbooks, take unreasonably low salaries, or fail to keep corporate minutes.
These are actions that a litigant’s attorney or specious IRS agent may use to pierce your “corporate veil,” exposing your personal assets to attachment and seizure, and crippling effective tax management.
Let’s address each of these in turn.
Your corporate account is not a personal checkbook.
If you need to withdraw money from your corporation, you should write yourself a paycheck, put the money in your personal account and spend it from there. Don’t be tempted to skirt those important steps; don’t pay personal bills directly from the corporate account.
Salaries must be reasonable for the services provided.
You should not use your corporation to avoid paying Social Security and Medicare taxes. And it is the government, not you, who defines “reasonable.” Living on shareholder loans or distributions to keep your taxable income down triggers audits (especially when officer wages drop below certain thresholds).
Cover your basis (equity).
Negative equity can limit losses you or your corporation may use during tax time. This can be a nasty surprise, especially for pass-through S-Corporations. Just when you think you have reduced your tax bill, you get an unpleasant call from your CPA, explaining that you can’t use a deduction due to basis limitations.
“You mean I can’t write off that $50,000 I put into digital radiography after all?!”
I hate those calls. Look at your balance sheet to determine whether your assets are greater than your liabilities. If not, call your CPA, since this is akin to overdrawing your bank account.
Corporate minutes matter (as do state filing requirements).
Corporate minutes are the most important and most often neglected compliance procedure. Simply stated, they are a record of shareholder/officer meetings, held regularly to make and document decisions about officer salaries, equipment purchases, borrowing, lease renewals, pension plan management, etc.
Failure to keep corporate minutes or comply with corporate bylaws exposes you and your practice to avoidable liabilities.
Lastly, many states require you to regularly file a corporate statement of information. In California, this used to be every two years, but it recently became annual. It costs $25 in California if filing on a timely basis; the late-filing penalty is $250!
Next week, I will discuss problem and solutions related to complying with labor laws and the nuts and bolt of a well run retirement plan. Feel free to leave your comments or questions below. I’d be happy to discuss them with you.
#2)The Fiduciary Role in a Well Run Retirement Plan
Another retirement plan issue that can keep your friendly Wealth Advisor/CPA up at night includes your fiduciary obligation as a retirement plan sponsor (trustee).
Bottom line: Have you taken adequate, documented steps to ensure that your retirement plan is being managed in the highest interest of its beneficiaries (your staff)?
Components in a well-managed plan include its costs, provider relationships and investment options.
According to the Prudent Investor Rule, you can (some might argue should) delegate investment option selection to a professional investment advisor who is willing and able to accept that fiduciary role. (Therein lies an article all its own!)
However, note that ensuring reasonable plan costs and appropriate provider relationships are fiduciary obligations that cannot be reassigned. They’re all yours.
In essence, if you offer participants a portfolio of low-cost, diversified mutual funds and you carefully document the processes taken to arrive at your decisions, you should be able to avoid liability from claims that you invested employees’ money inappropriately, with resulting demands to make them whole.
But suffice it to say, with respect to fiduciary cost management, there are a ton of intricacies and gotchas. For example, if a “cost-free” plan sounds too good to be true … guess what? It is.
“Cost-free” simply means the costs are there, but they’re buried in the underlying investments. This means your participants end up paying these otherwise tax-deductible costs with pre-tax dollars. How’s that for insult and injury?
It may be tempting to believe that you can fulfill your duty by leaving everything up to your employees, setting them up with their own segregated accounts. Worse yet, I’ve encountered 401(k) plan sales people telling dentists this is the case.
Quite the contrary, segregated accounts can be fatal move for you and your staff if they are given poor or too many investment choices and they lose money or incur significantly higher costs than you or other plan participants.
#3)Estate Planning and a Well Run Retirement Plan
Before we leave the subject of retirement plans, I further worry with respect to your own retirement plan assets, and whether they are properly designated for your estate planning purposes.
For example, if you have named a trust as your primary beneficiary, you may inadvertently severely limit planning opportunities for your spouse or even non-spouse beneficiaries. It’s also important to ensure your paperwork is properly established and free from discrepancies.
Be aware that a custodian’s documents are expected to prevail over those held by the advisor or pension plan administrator.
#4)Estate Planning in General
One good worry begets another.
As I advise clients on their practice management, I find even dentists with well-run offices have often left their personal estate plans to languish. I have a middle-aged couple – both doctors – with two early twenty-something children, a free and clear home, retirement and personal funds of close to $4M, and, they have no wills and no trust!
Never mind the probate costs and taxes, I don’t think it is fair to put one’s children in the position of having to decide when to “pull the plug” on their parents should they be on life support, nor do I believe they should have unrestricted access to a couple million dollars each at such an early age.
I also worry when I see estate plans in full or partial disarray.
For example, if a dentist has gone through the entire estate planning process and then failed to actually place the personal assets in the established trusts, he or she has just spent a fairly good-sized chunk of change for nothing.
Go ahead and laugh, but I see this happen far more often than you could guess.
When is the last time you’ve reviewed your own plans, to ensure that they are complete and current?
#5)Other Issues to Consider
I have still other worries.
Are my clients sufficiently protected against identity theft?
Are their electronic records properly backed-up and secured?
Is their personal and professional insurance current and appropriate – neither too much nor too little?
But I don’t want to merely transfer my worries to you; I want to alleviate them – for you and for me. If you take one key idea from this, I hope by now I’ve made it clear how vital it is to avoid climbing walls of worry all by yourself. You don’t have to … and you shouldn’t.
Do yourself, your staff, your Wealth Advisor/CPA a favor. Don’t try to keep up with it all in your spare time. Seek out reputable professional alliances, so you can focus on your own interests. In the words of Dr. Burris:
“It is amazing how much more effective I’ve been by focusing on what only I can do in my practice while others do what they do best.”
Maybe I’ll change my own title to Haden Werhan, CPA/PFS, Professional Worrier.
I seem to be pretty good at that.
J. Haden Werhan, CPA/PFS
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