Doug Houser:
Not from Rea & Associates studios, this is unsuitable on tour, a management financial services podcast for entrepreneurs, tenured business leaders and others who are ready to look beyond the suit and tie culture for meaningful, measurable results. I'm Doug Houser. On this weekly podcast thought leaders and business professionals break down complicated and mundane topics, and give you the tips and insight you actually need to grow as a leader and help you organize and thrive. If you haven't already, hit the subscribe button so you don't miss future episodes. And if you want access to even more information, show notes and exclusive content visit our website at www.raeacpa.com/podcast and sign up for our weekly podcast newsletter.
So on today's episode of unsuitable, while we're on tour, we're going to dive a little deeper into the world of practice ownership and the strategies available to help practice owners offset the high costs associated with building or expanding office space, purchasing equipment and beyond. Ted Klimczak, a CPA and senior manager and Rea & Associates, Medina office, and specialist on the firm’s tax team, is here to give us some tips to help you reduce your tax bill, maximize your wealth, and better manage your day to day operations. Welcome to unsuitable, Ted.
Ted Klimczak:
Thanks, Doug. Glad to be here.
Doug:
Thank you for making the Trek from Medina to Cleveland today.
Ted:
It was a long half an hour drive.
Doug:
Good to hear. So talk to us a little bit about practice growth and practice development and what it means as a practice, a medical practice looks to expand. What are some of the things that we try to do to help those folks?
Ted:
Sure. So there are a lot of things that you can do. One of those is if you do have a medical practice that's looking to significantly expand their building or looking to maybe purchase a new building or maybe they even purchased a building a couple of years ago, but there hasn't been a lot of depreciation on that building to date, one of the things you can look at doing is a cost segregation study.
Doug:
Okay.
Ted:
So what a cost segregation study is, it's where you... Let's say you buy a building for $1 million, just to throw around number out there.
Doug:
Right.
Ted:
Ordinarily, you might depreciate that building over 40 years, it's a straight line, and get 1/40th of that each year for the next 40 years.
Doug:
Right. Not that advantageous.
Ted:
Not that advantageous. But there is a cost segregation study out there where you can go and it breaks the building down into its components, so you can depreciate it a lot quicker and get your money back out of that building a lot quicker. They take a look at it and there might be five years, seven-year, 15 years, 20-year property in there. And whatever the useful life of those assets are, you pull it out and it's depreciated over those lives and then the rest of the building is over 40 years and there are the savings.
Doug:
So you take advantage of accelerating some of those costs over a shorter period of time, in essence. That's fantastic.
Ted:
You do. And it's one of those things where... I've heard that if you have $500,000 or more in the building, it might make sense to go ahead and take a look at that. Anything less, it probably doesn't make a whole lot of sense, the savings isn't substantial enough.
Doug:
Yeah.
Ted:
But definitely something to be aware of and to take a look at.
Doug:
Now, we continue to see a lot more consolidation in the medical practice area, is that true particularly with any particular segment there? Dental, medical? I know in the vet world there's a lot of that going on.
Ted:
There is a lot of consolidation. There constantly bigger firms, bigger practices, buying up smaller ones. I know in our office a lot of the smaller practices have pretty much gone away and they're getting gobbled up by the bigger ones. And it just goes with the territory this time.
Doug:
Yeah. And how you structure those can have a big say in how you treat those, obviously, for tax purposes as an asset purchase. Right? Then you can depreciate those assets over the useful life as you acquire them, versus if you actually acquire the stock of the company.
Ted:
That's correct.
Doug:
Yeah. So that's important again, to get with your advisor. Right?
Ted:
Definitely very important to talk to your advisor. They can make you aware of... And the most important thing is to talk to them before something happens. Obviously, after the fact, after it's been put in emotion, it's a lot more difficult to unwind some of that.
Doug:
Yeah.
Ted:
But get them involved early and get them involved often and you can definitely reap the benefits from that.
Doug:
Yeah. Now, what about purchasing new equipment? There are great attractive interest rates right now for folks purchasing new equipment, so how can that play into it as well in terms of taking advantage of the tax rules there?
Ted:
Yeah, interest rates are fantastic now and depreciation is really aggressive. So there are a couple of different things that are available right now. 179 and bonus depreciation or two where you can write off the cost of an asset in the first year, take the whole cost and... For section 179 and bonus depreciation, those are just accelerated depreciation methods. Think back to the first thing we were talking about with a cost segregation study, when you're accelerating depreciation you're getting a benefit in this first year, or more quickly than you ordinarily would over the life of the asset. So where this might make sense is if you think you're going to be in a larger tax bracket this year, or if you think that... As long as you don't think you're going to be in a higher tax bracket in future years to where you might want to postpone some of that and kick that can down the road. Most people, if I said I was going to give you $15,000 today or give you $15,000 over the next seven years, what would you take?
Doug:
Right. Take it today.
Ted:
Take it today. Yeah, you definitely take it today. So obviously bonus depreciation 179, they can allow you to do that by writing off the cost of these assets in the first year and getting a monster depreciation deduction and getting a lot of tax dollars back instead of over the life of the asset.
Doug:
But again, you want to do some planning with that and talk to your professional, talk to us about, "Okay, what limits might there be there." Different things like that. Do some planning with regard to that.
Ted:
Exactly. Because you don't want to have the situation where you wished after the fact that you had done planning, and now over the next seven years or so you don't have that available. And maybe those are more profitable years and you'd wish that you'd done a little bit more planning and you could have saved a lot more money in the long run.
Doug:
Right.
Ted:
But section 179, I believe you can put up a little over $1 million in the service, and write that off in the first year. We haven't had any clients, at least in our office, that have come close to that putting $1 million into service. But obviously there are huge limits and then bonus, I don't even believe there is a limit on that, how much you can put into service. There used to be a lot of differences between the two, between bonus and 179. But with some of the recent tax law changes, a lot of those have gone away.
Ted:
There are a lot more similarities now I think than there used to be. Before if you recall, bonus depreciation used to behave to be on a brand new asset whereas section 179 just could've been new to you. You could also use bonus appreciation to create a loss. And there was a strategy where you could carry that loss back and recover money from prior years, but that since gone away. So talk to your advisor and they can definitely steer you in the right direction once they have a conversation with you and they know what your long-term plan for the business is.
Doug:
Yeah. So in your experience, in dealing with those in our dental practice areas, our vet practice areas, what other trends are you seeing in those segments? We know there's a lot of consolidation. Anything else that you see coming down the pike here in 2020 and beyond, in terms of trends there?
Ted:
Staying in line with what we were just talking about, technology is advancing a lot. The students coming out of school, they're using the most high tech technology in class and they kind of anticipate that they're going to be using that in practice. So if your equipment is older and you're not up with the times, you one might not attract the most talented individuals to come to your practice, they want to use that equipment that they were trained on. And then aside from that, you're not going to be as competitive out there. Patients demand that as well. They're aware of the different things that are out there. And if they see one practice that's using it and one that's not, they're probably going to want to go to the more high tech practice.
Doug:
Great pint.
Ted:
So going along with that, if you need to purchase equipment with some frequency year after year, those section 179 and bonus depreciation limits are available. And you can definitely put more money back in the practice or to work for you in other ways.
Doug:
And again, given the low-interest rates right now, if you look at the return on investment, in theory, it's never been better if you're convinced that you can certainly grow your practice and attract those patients and do that type of thing. But like you said too, it's all about the culture that, that creates within your business and your practice as well in terms of attracting talent, retaining talent, customers, all those types of things it's all a part of it.
Ted:
Yeah. And those are one of the biggest trends that I think we see across all industries right now, is it's just so hard to attract and retain quality people. And the medical and dental industries are no stranger to that as well. It's not just a manufacturing issue, it's not just an issue for non-service industries, but-
Doug:
Across the board.
Ted:
Across the board.
Doug:
Yeah. Let's shift gears a little bit and talk about retirement savings. We see this across a lot of businesses as well, where folks that are in the kind of the so-called baby boom generation, they've run their business or their practice, been successful, particularly had a good run over the last 10 or 12 years post-crisis. But now they're starting to think about what do I do? How do I have a liquidity vent? How do I cash out? So what kind of trends are you seeing there? What should people be thinking about?
Ted:
Yeah. So speaking about retirement, one of the nice things if you're able to put away early and often is you have time on your side. You have time, value, money, you get to put that away. Hopefully, it grows. I know what the market's been doing now, so...
Doug:
Right.
Ted:
But aside from that, if you have time on your side, you put as much away as you can. If you have a dentist or doctor, it doesn't even have to be a medical professional, but if someone's maxed out, one of the strategies that they could do is they could have their spouse work in the business. Put them on payroll, have them put away some money, and then at the same time you're putting more away as a couple for retirement your nest egg is a lot bigger when it does come to retire.
Doug:
Right. So if they're making those maximum contributions to their retirement plan, there certainly are ways again through planning to try to increase those.
Ted:
Right. There are ways with planning where you can go ahead and put a lot more away for retirement just by getting your spouse involved in the business. And I've seen that in a lot of dental practices where the dentist will be working with the patients and the spouse be working in the office and making calls and making sure things run smoothly. So there's definitely a lot that can be done, it's just a matter of knowing what's out there and what you can do.
Doug:
Yeah. Absolutely. So one of the other big things we see when a business starts transition is knowledge transfer. So how do they accomplish that in the, either dental or our vet practice or medical practice? Are there set formulas that one practices are transferred or absorbed by another area? What kind of thing do we see with that?
Ted:
Yeah. So you can have a situation where a doctor or dentist will bring in another doctor, dentist and they'll learn from them and they'll kind of stay in the practice for a few years. They'd make sure things are running and there's a smooth transition. Obviously that's important because if you're buying the practice then you want to make sure that the patients are comfortable with the new person coming in.
Doug:
Right.
Ted:
A lot of them have been patients for life, potentially, and you want to make sure they're well taken care of. And then the new person wants to make sure that they're buying a book business that is going to be around.
Doug:
That's sustainable.
Ted:
Sustainable, right.
Doug:
Yeah. We've heard some of those horror stories where some maybe have walked in without as much due diligence and not had those relationships built, not have that knowledge transfer there and not really gotten everything that they thought they would get in that situation.
Ted:
Right. It happens.
Doug:
It goes back to doing your due diligence and having other people involved. Right? And taking a look at beyond the financial results. Certainly understanding those is a big part of it, as well as the tax situation, all of that as well, state and local tax risk. Do you see that cropping up much as well when we're talking about types of transfer events, things like that? I know that that occurs in some industries. Have you seen some of that?
Ted:
There can be some. And staying with the state and local tax risk idea of things, there's a lot of things that are available to doctors, dentists. It doesn't even have to be doctors and dentists, it really can be across all industries. But there are things that are available like the Ohio Business Income Deduction, where if you have an "Aha" business, you can write off up to the first $250,000 of profit single or married filing joint, and it's 125,000 for the other filing statuses. But really what that does is if you have... You're not going to pay tax on that first $250,000 of profit. And anything above that first $250,000 would be taxed at a maximum rate of 3%.
Doug:
Right.
Ted:
Instead of the regular, let's call it 5% for Ohio. So there's definitely some savings opportunities that are there. And it's definitely something that's been around for a while, but not everyone might be aware of it. Some other people might not be aware doctor, dentist wise. Let's say you have a S-corporation and... So it's a passed entity, it's not going to pay its own tax, it's going to pass that through to the individual and they're going to pay tax on their individual income tax return. But what they might not be aware of is if they're also getting a W2 form that S-corporation and they're a 20% or more owner in that S-corporation, their wages also get added back and they won't have to pay tax on that, or they'll pay tax at the lower rate if they're over the 250.
Doug:
Yeah. So again, it comes back to the planning and have those conversations, make sure you structure it the right way.
Ted:
Right. If you structure it the right way, then you might be able to significantly reduce your Ohio withholding because instead of just getting it back year-end, you might be able to have more money in your pocket throughout the year, which I know a lot of medical professionals, they'd rather have that throughout the year and have more money in their pockets to put back into their practice.
Doug:
Sure. Absolutely.
Ted:
Or to take a nice vacation. Then maybe not a cruise this time of the year.
Doug:
Right. Avoid the cruises. Right? So what are we seeing? Are we seeing a lot of this kind of aging out in businesses? Have you experienced much of that as The Boomer Generation nears that quote-unquote "Historic retirement age?"
Ted:
Yeah. It's definitely a concern. It's definitely a concern for pretty much all businesses, because as you said, and a lot of the boomers are starting to age out they may not have somebody else to go ahead and pass the reigns off to. We've had a number of clients that have tried to get their kids involved in the business with mixed results. You want to make sure that if you don't have somebody, a key employee or child or somebody that's going to be taking over the business, and you're looking to sell the business, that you actually know what it's worth.
Doug:
Right.
Ted:
A lot of times business owners, have an inflated value of what they think the business is actually worth.
Doug:
Yep. We see that frequently.
Ted:
It's their baby. They've poured their blood, sweat, and tears into it over the years. And they think the value is way up here, but in reality, that's because they're the one that's working in the business 80 hours a week and that's why it's so successful. But you take them out of the equation, is there really a sustainability there? Maybe the answer is yes, maybe no. But you definitely have to kind of make sure that they understand that and that they're not dreaming about something that's not going to come to reality.
Doug:
And that's why it goes back to our best practices, we tell folks whether or not we do it or not, get a valuation done every year or two, so you have some benchmark, some starting point. And you can identify the areas where you can increase the value your business by, as you said, transferring that knowledge. Maybe it's caught up with one or two people at the top. Maybe you have risks in other areas. State and local tax risk, you can do a risk assessment there. Different things like that, that can help you increase that value so that you can transfer it and get what you think. Right? We often hear these stories, you've got the friend at the club or whatever and they say, "Oh yeah, I'm going to get eight or 10 times for my operation." That's not really the case.
Ted:
No.
Doug:
So it all goes back to trying to counsel folks and providing more than just the product, just that the tax return or the review or audit that we provide. But sitting down and having that conversation where the business is at.
Ted:
Yeah. The value is really in the conversation. Obviously the product is something that's necessary, it's just compliance-related, but it's the conversations that you have with your clients that really help shape the future, where their future is going to be.
Doug:
You talked about bringing in the spouse. Do you find a lot of times that you're able to bring in the family to kind of have some of that dialogue? Because I would think that's important obviously. Right? During those...
Ted:
It is. Yeah. You want to make sure that everyone's on the same page. And sometimes you'll have a conversation with a business owner and they think that they're going to pass the reigns over to the kids and the kids are going to take the business and run with it. And then you have a conversation with the kids and the kids say, "Yeah, I don't want to work in that business." Or, "I don't want to work with my family or my parents or whatever." Some love it, some don't. It's not for everybody. But it's one of those things where you want to make sure that those conversations are happening so that everyone's on the same page. And it just makes things run a lot more smoothly.
Doug:
Yeah. It all goes back to that planning. I know I've run into one years ago where the... Similar story, construction business, and he thought his son would take it over and his son worked in the business, but he had no interest in running it. So then it was kind of a scramble to find somebody to run it so that it would be sustainable and keep the family's financial wellbeing intact and the company and the employees and all of that. But it can be challenging. Some of those soft conversations are often more important. And it ll goes together with the tax planning, estate planning, retirement planning that you talked about. So that's where having all of the experts together is so meaningful. So if we look ahead to 2020, what else, what other advice would you give to business owners in terms of if they're looking to grow their business? We're still running in a good economy, what are the other areas that they should be focused on, in your opinion? Beyond looking at maybe cost-seg or equipment expansion, those types of things. Where we're some hot button areas?
Ted:
Yeah. So this one's maybe not so much a tax or accounting issue, but just having somebody else on the checking account. So that in the event that there was an emergency that came up and maybe the doctor or dentist was incapacitated for some reason, that way the business can kind of continue and payroll can be made and vendors can get paid and it just runs a lot more smoothly if you have somebody else on the account. Now if you have your spouse working in the business, hopefully you trust your spouse and they can be the person on the account. Otherwise, you do have to have a key employee that you trust. You are giving up some control and there is some risk there. Obviously there can be fraud, there can be other issues with theft, but in the event that there was an unforeseen circumstance or emergency, it's nice to have somebody else in the account to continue the business.
Doug:
That's a great point. So you've got certainly to have the right controls in place, but if you've got somebody else that can take the reins so to speak. It all goes back to that whole concept of being able to transfer the knowledge, transfer the operation of the business so that it's not solely reliant on that one person. Right?
Ted:
You got it.
Doug:
Yeah. That's awesome. So great advice, Ted, really appreciate your insight and outlook and tips on selling the practice and transferring that and some things to increase value. So that's valuable insight.
Doug:
If you want more business tips and insight or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast. And while you're there, sign up for our weekly podcast newsletter for exclusive content and show notes. Thanks for listening to this week's show. Be sure to subscribe to unsuitable on Apple Podcasts or wherever you're listening to us right now, including YouTube. I'm Doug Doug Houser. Join us next week for another unsuitable interview from an industry professional.
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The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.
