LUTZ BUSINESS INSIGHTS
Tax Best Practices for Independent Medical Groups
BRYAN FREW, TAX DIRECTOR
1. Choose the right retirement planRetirement plans for independent medical groups can be divided into two main categories:
- Defined benefit plan
- Defined contribution plan
Defined Benefit PlanA defined benefit plan offers a guaranteed income for life upon retirement. The amount typically depends on factors such as years of service and salary. Defined benefit plans are not as common in the private sector, and the funds are generally inaccessible until retirement. The company assumes responsibility for the money and for its disbursement when payments are due. In other words, if the funds do not bring enough returns to cover the retired employee’s pension amount after investment, the employer bears all the risk. As a result, the costs of administration for this type of plan can be extremely high because it requires insurance and complex actuarial projections for guarantees. In a defined benefit plan, retirees can choose lump-sum or annuity payments. Annuity payment plans are more popular because they do not require managing a ton of money, and retirees are less likely to be affected by market interference.
Defined Contribution PlanThe employee is largely responsible for the investment in a defined contribution plan, but often the company will make matching contributions up to a certain limit. A 401(k) is a good example of a defined contribution plan. The employer is not responsible for the performance of the funds after disbursement, which means low risk and less administration cost for the company. The employee makes the contributions and chooses among the investments provided by the plan. With this type of plan, you are limited to the amount of contribution you can make each year. The max contribution to a defined contribution plan is $61,000 in 2022 (adjusted for inflation) with an additional $6,000 catch-up contributions for individuals aged 50 and over.
2. Entity SelectionMany factors must be considered when choosing what type of entity the practice is to become. A common setup is to have the operations of the practice as an ‘S’ Corporation and the real estate and large medical equipment to be owned by an LLC taxed as a partnership. The practice (S-Corp) would then have a rental agreement with the real estate company for the use of the building and equipment. The purpose of the S-Corp is to receive desirable tax treatment for the profits of the business (taxed as ordinary income) and the services the physician provides (taxed as both ordinary tax rates and subject to FICA tax). If the practice were taxed as a partnership, the physician would find that all of his or her income would be subject to both ordinary tax rates and self-employment tax rates. If the practice was taxed as a C-corporation, the physician’s earned income for services provided would be taxed at ordinary rates and FICA rates, while the profits of the practice would be distributed to the owner as a taxable dividend AFTER the entity paid corporate taxes, resulting in the dreaded “double taxation”. With the dual-entity system in place, the entity renting the building and equipment would not be subject to self-employment tax as a partnership and receives favorable tax treatment via IRS section 754 when ownership changes occur. There are various reasons one may make different entity selections. This makes it much more important to consult an experienced business advisor when setting up a new private practice.
3. Job-related expensesOne way physicians in private practice can relieve their tax burden is by deducting physicians’ job-related expenses. The tax cuts and jobs act eliminated itemized deductions for unreimbursed employee expenses. This does not favor W2 employees who use after-tax money on job-related expenses. However, business owners can still deduct any expenses that are ordinary and necessary even if the IRS doesn’t consider the expense “indispensable”. Private practitioners often find themselves with expenses that qualify as both necessary and ordinary, but the other partners are unwilling to incur that expense. For example, a physician with a satellite clinic would consider spending $7,000 on a marketing campaign as an ordinary and necessary expense, but his or her partners may not want to share in that expense. Private practices can use creative compensation models to allocate these expenses to the right owner so that partner-specific deductions do not affect the others’ compensation. Contacts us if you have any questions or learn more about our healthcare accounting and consulting services.
ABOUT THE AUTHOR
BRYAN FREW + TAX DIRECTOR
Bryan Frew is a Tax Director at Lutz. He began his career in 2009. He is responsible for providing taxation services to businesses and individuals, as well as trusts and estates with a focus on medical practices.
AREAS OF FOCUS
- Individual & Business Taxation
- Estate & Trusts
- Healthcare Accounting & Consulting
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- BSBA in Accounting, University of Nebraska, Omaha, NE
- Third City Community Clinic, Past Treasurer
- Volunteer Coach for Youth Sports & Camps
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