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Tax and legal tips for Dentists and Physicians

posted Sep 14, 2014, 10:56 PM by Zaher Fallahi   [ updated Oct 24, 2014, 10:32 PM ]

Disclaimer: The tax and legal tips contained herein below are for general informational purposes only. They are not intended to and may not be construed as tax or legal advice. For specific advice suitable to your situation, please consult us or your tax or legal advisor.

Although, all businesses may benefit from these tips, they are directed to medical professionals because we have been the Dental & Medical CPAs since 1992. We also advise clients on legal matters because we are a law firm well.

If you are a sole proprietor MD or DDS with gross receipts in excess of $100,000 per year, your chance of being audited by the IRS is higher than an average taxpayer. Consult a lawyer for incorporating your practice. Draft all business related contracts in the name of your corporation. Incorporation of a dental or medical practice doesn’t protect the doctor from professional liability or malpractice (actions brought by the patients against you), and you still need sufficient malpractice liability insurance. A professional dental or medical corporation, however, protects you against general liability (such as lawsuits brought against you by employees, suppliers, and other business related transactions), provided that the corporation is incorporated properly, all formalities are followed, and the laws are compiled with. Think of your corporation as a separate legal entity, and any financial and legal transactions between you and your corporation must be handled with corporate formalities. To prevent the piercing the corporate veil (setting aside the corporation and holding you personally responsible); do not pay your personal expenses from the business, any loan to and from the corporation must be memorialized (no commingling), and prepare the corporate minutes for all major business decisions. Often, doctors find out about deficiencies in their corporation when they are sued or audited.

In purchasing a dental or medical corporate practice, you may consider buying the assets rather than the corporation as an entity, to avoid any potential lawsuits associated with the acquired practice. Have a thorough due diligence task done by a qualified professional before the purchase. Seek legal advice from a lawyer for drafting your purchase contract, and consult a tax lawyer for a tax-wise allocation of the purchase price among various acquired assets before the escrow closes. This process is very important because of its far-reaching legal and tax ramification on your practice. Somewhat different procedures may be followed in the sale of your dental or medical practice.

For income tax purposes, you may elect your practice be set up as an S corporation. An S corporation does not pay the federal income taxes, and its state income tax is the greater of $800 a year or 1.5% of the net income. In an S corporation, the working shareholder doctor must be put on the payroll with reasonable amount of compensation. To minimize your taxes, the net income is divided into the doctor’s salary and the corporate distribution. Paying unreasonable salary to shareholder doctors has been a major IRS audit trigger for years. Although, there is no rule of thumb formula for determining a “reasonable salary” for a doctor, such determination is made by professional advisors using case laws, the doctor’s specialty, experience, the net income and other pertinent matters. In the past, the IRS has claimed that a doctor has not paid herself or himself a reasonable amount of salary in an S corporation. And, they have argued that the owner’s compensation in a C corporation was excessive. Each argument may have its own merits and serious tax consequences. It is important to seek advice of CPAs, lawyers or other advisors who possess experience in the dental and medical field. It is recommended to have your payroll done by the tax preparer or CPA firm preparing the accounting and tax work, because they need to monitor the reasonableness of your compensation and perform year-round tax planning for you.

Do not classify the dentists or physicians who are working for you as independent contractors without discussing it with your tax attorney/advisor. This misclassification has subjected many physicians and dentists to the IRS and California Employment Development Department (EDD) audits and cost them dearly in taxes, penalties and legal fees. Generally, the auditors extend these audits to three previous years. There are numerous statutory determinant standards by which the courts determine proper classification of someone working for you as an independent contractor or an employee.

It is extremely important to utilize services of experienced CPAs or accountants for preparing your accounting and tax work. My experience in representing many doctors before the IRS and EDD has revealed that this issue is the number one audit trigger. A professionally trained accountant would ensure proper preparation of the underlying financial statements, eliminate and prevent many audit triggers. I have also noticed that many medical professionals use sub-standard accounting and tax work because of the low fee. Always remember the famous saying; I am not rich enough to afford cheap service. Sometimes these cheap services turn out to be very costly. It is very common that when these doctors get audited, they retain the same tax preparers whose low quality work has caused them to be audited in the first place. In case of a tax audit, it is advisable to hire a tax attorney because of the Attorney-Client Privilege, not provided by a non-lawyer advisor. Attorney-Client Privilege prevents the taxing authorities from subpoenaing confidential information provided to lawyer by client. Frequently, these tax preparers are called as witnesses against their taxpayer clients.

Zaher Fallahi has specialized as Orange County Dental CPA and Doctor’s CPA, and Los Angeles Dental CPA and Doctor’s CPA since 1992. Los Angeles (310) 719-1040 and Orange County ( 714) 546-4272 or e-mail : taxattorney@zfcpa.com

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