Incorporating A Dental Practice???


D

D.D. Palmer

My brother is a dentist and I help him with his accounting
from time to time. I have a conceptual question. Right now
he's a "Schedule C" business. What would be the advantages
of incorporating, using real numbers? His net income is
about $150,000 to $200,000 per year from practice income,
although has has sold a number of clinics (he starts clinics
then sells them to the new dentists coming out of school)
that generate large capital gains.

Most of the reasons given for incorporating are to limit
liability. Yes, that's true if someone slips and falls in
your waiting room...but the BIGGEST risk to health care
professionals is malpractice, for which incorporation
shields nothing. Incorporating doesn't seem worth the extra
accounting and legal work (fees) from that an "asset
protection" perspective since it doesn't shield malpractice
judgements.

I have heard others justify incorporating small health care
professional practices on the basis that you can take a
small paycheck, subject to payroll taxes, then take the rest
as a dividend that is not subject to payroll taxes. That
just doesn't sound kosher to me. I suspect somewhere along
the line the IRS would say that it's unreasonable for a
dentist to take a $50,000 salary and have $150,000 in
practice dividend income. If I were on the jury, I would
even convict on the basis that ALL of the income is earned
practice income and it doesn't take a forensic accountant to
understand the tax scheme that incorporating is trying to
pull off.

One final question. Under what tax structure are dividends
from "S" Corporations on professional practices taxed? Do
they get the new 15% rate? I suspect not, since "big
company" dividends are given that rate to individuals only
after the corporation pays taxes.

Your opinions are appreciated.

D.D. Palmer
 
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K

KenB

(he starts clinic
then sells them to the new dentists coming out of school)
that generate large capital gains.

I suspect somewhere along
the line the IRS would say that it's unreasonable for a
dentist to take a $50,000 salary and have $150,000 in
practice dividend income. If I were on the jury, I would
even convict on the basis that ALL of the income is earned
practice income and it doesn't take a forensic accountant to
understand the tax scheme that incorporating is trying to
pull off.
You state that all the income is earned from practice income
and that is correct. But all the income is not necessarily
earned income subject to social security taxes.

Practice income has two components: 1.) Return on labor, and
2.) Return on capital. The return on labor should be
represented by a reasonable salary. But the business owner
is also entitled to a return on his capital invested in the
business and not subject to social security.

The breakdown of these two components in an unincorporated
business is not possible; all the income is subject to
social security. Thus, one might incorporate and reduce
social security taxes by paying a reasonable salary and
properly draw the rest out as a return on capital (within a
Subchapter-S corporation). Income tax will be paid on all
the income, but social security tax may be properly reduced.
 
S

shagnasty

D.D. Palmer said:
My brother is a dentist and I help him with his accounting
from time to time. I have a conceptual question. Right now
he's a "Schedule C" business. What would be the advantages
of incorporating, using real numbers? His net income is
about $150,000 to $200,000 per year from practice income,
although has has sold a number of clinics (he starts clinics
then sells them to the new dentists coming out of school)
that generate large capital gains.

Most of the reasons given for incorporating are to limit
liability. Yes, that's true if someone slips and falls in
your waiting room...but the BIGGEST risk to health care
professionals is malpractice, for which incorporation
shields nothing. Incorporating doesn't seem worth the extra
accounting and legal work (fees) from that an "asset
protection" perspective since it doesn't shield malpractice
judgements.

I have heard others justify incorporating small health care
professional practices on the basis that you can take a
small paycheck, subject to payroll taxes, then take the rest
as a dividend that is not subject to payroll taxes. That
just doesn't sound kosher to me. I suspect somewhere along
the line the IRS would say that it's unreasonable for a
dentist to take a $50,000 salary and have $150,000 in
practice dividend income. If I were on the jury, I would
even convict on the basis that ALL of the income is earned
practice income and it doesn't take a forensic accountant to
understand the tax scheme that incorporating is trying to
pull off.

One final question. Under what tax structure are dividends
from "S" Corporations on professional practices taxed? Do
they get the new 15% rate? I suspect not, since "big
company" dividends are given that rate to individuals only
after the corporation pays taxes.
There is no advantage unless he wants to set up some fringe
benefits thru the corporation.

Even if paid himself a reasonable salary, it would only
shield him from the medicare portion of SS since a
reasonable salary would be above the SS max.

S Corp dividends are not taxable as such or treated as a
corporate dividend. The tax is on the profit and all profit
is taxable to the stockholders. There is no tax on the S
Corp. If he sets it up as a C corp it would be a personal
service corp subject to the top tax rate on profits.
 
F

Frederick Jorden

D.D. Palmer said:
My brother is a dentist and I help him with his accounting
from time to time. I have a conceptual question. Right now
he's a "Schedule C" business. What would be the advantages
of incorporating, using real numbers? His net income is
about $150,000 to $200,000 per year from practice income,
although has has sold a number of clinics (he starts clinics
then sells them to the new dentists coming out of school)
that generate large capital gains.

Most of the reasons given for incorporating are to limit
liability. Yes, that's true if someone slips and falls in
your waiting room...but the BIGGEST risk to health care
professionals is malpractice, for which incorporation
shields nothing. Incorporating doesn't seem worth the extra
accounting and legal work (fees) from that an "asset
protection" perspective since it doesn't shield malpractice
judgements.

I have heard others justify incorporating small health care
professional practices on the basis that you can take a
small paycheck, subject to payroll taxes, then take the rest
as a dividend that is not subject to payroll taxes. That
just doesn't sound kosher to me. I suspect somewhere along
the line the IRS would say that it's unreasonable for a
dentist to take a $50,000 salary and have $150,000 in
practice dividend income. If I were on the jury, I would
even convict on the basis that ALL of the income is earned
practice income and it doesn't take a forensic accountant to
understand the tax scheme that incorporating is trying to
pull off.

One final question. Under what tax structure are dividends
from "S" Corporations on professional practices taxed? Do
they get the new 15% rate? I suspect not, since "big
company" dividends are given that rate to individuals only
after the corporation pays taxes.
Given the nature of your brothers affairs he should pay a
quaffed tax expert and attorney to evaluate his
alternatives. I notice you have not thought of the C
corporation alternative. In some cases it may be
interesting. The S corporation undistributed income is
generally taxed at ordinary rates and the "dividends" are
tax free, since the income was previously taxed to the
shareholder.
 
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S

Stuart Bronstein

D.D. Palmer said:
My brother is a dentist and I help him with his accounting
from time to time. I have a conceptual question. Right now
he's a "Schedule C" business. What would be the advantages
of incorporating, using real numbers? His net income is
about $150,000 to $200,000 per year from practice income,
although has has sold a number of clinics (he starts clinics
then sells them to the new dentists coming out of school)
that generate large capital gains.

Most of the reasons given for incorporating are to limit
liability. Yes, that's true if someone slips and falls in
your waiting room...but the BIGGEST risk to health care
professionals is malpractice, for which incorporation
shields nothing.
Well, not quite nothing. A corporation will shield someone
from the malpractice of his "partners." Depending on how he
structures these sales, he might be (at least arguable)
liable to a patient for malpractice by someone who buys a
clinic from him.

Stu
 

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