Be Smart About Tax Planning
By: Justin Morgan, Esq. – Wood and Delgado Matthew Christie, VP, Bank of America
Nothing is more frustrating than being unable to obtain financing at the best terms because of inadequate tax planning. At Bank of America Practice Solutions, we interact with operationally excellent practices regularly, but are too often unable to extend financing because the business tax returns fail to reflect the financial strength of the practice.
Let’s consider the following example: Just last week, we were unable to extend financing to a dentist with a million-dollar practice seeking to refinance current debt and acquire a second location. In our initial conversation with the doctor, the deal seemed solid. The credit score, cash reserves and the doctor’s stated personal income were spectacular. Yet our excitement wilted upon reviewing the practice tax returns. Although this was a million-dollar practice, the total income stated on the tax return reflected an owner’s net of only 15% of total revenues. This number included the owner’s wages, interest, depreciation, amortization and profit. When our credit partners compared the practice to an average practice, which has an owner’s margin of 38%, they decided to pass.
After digging deeper with the owner, we learned that personal expenses were deeply commingled with business expenses to reduce the owner’s tax liability. While this may have saved the owner approximately $15,000 in taxes, the owner lost the opportunity to acquire the second location and is stuck paying 6.5% interest on practice debt when Bank of America is offering 3.89% interest on loans up to 15 years.
Financial Hygiene
Can we agree that daily exercise, nightly flossing and biannual cleanings are good physical hygiene? Why doesn’t this principle apply with equal force to financial hygiene? While continuous monitoring of your practice’s finances is unnecessary, obtaining quarterly profit and loss statements should be implemented into your routine as soon as possible. Too often we see a correlation between poor financial oversight and poor performance. Owners of the highest-margin practices spend, in our humble opinion, a bit more time with their CPAs and financial statements, and it reflects in the bottom line. You might also consider using banking services that improve financial hygiene, like Bank of America’s award-winning online banking platform.
Tax Cuts and Jobs Act of 2017 Revisited
As a brief reminder, the Tax Cuts and Jobs Act of 2017 made small reductions to income tax rates for individual tax brackets and significantly reduced the income tax rate for corporations. Pertinent to dentistry, it also provided a large tax deduction for Qualified Business Income (QBI) and made it easier to depreciate business equipment in the first year through Section 179. The Qualified Business Income deduction is complex, but should be considered as a tax strategy for owners with taxable income under $415,000 (married filing jointly) or $207,500 (single). The Section 179 enlargement allows a business to depreciate equipment up to $1,000,000 in the first year, while it was subject to a $500,000 limit before.
All programs subject to credit approval and loan amounts are subject to creditworthiness. Some restrictions may apply. Bank of America, N.A. provides informational articles for your discussion or review only and not responsible for the information and materials third parties present. Please consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice. Depreciation allowances under Section 179 and other provisions of the Internal Revenue Code are available to you regardless of whether you obtain financing from us. You should consult with your tax advisor for your actual tax benefits. Bank of America Practice Solutions is a division of Bank of America, N.A. Bank of America and Bank of America logo are registered trademarks of Bank of America Corporation. ©2019 Bank of America Corporation.. AR: AR6KMRVL