In the summer of 2016, we were engaged by a buyer halfway across the country to assist them in buying a dental practice. The process went well, we provided the typical services during the process that included some aspects of income tax planning like price allocation, entity selection, etc. At that time, the buyer wasn’t interested in having us prepare income tax projections for them since it wasn’t at the top of their list of priorities. After closing, the buyer also chose to use the sellers CPA because they felt it would be a smoother transition for them since they already knew the practice and they were located closer to them in their state.
Fast forward to November 2017, the buyer reaches out to me and asks me if I remember them and if they could schedule a phone call with me, which we have. This doctor wasn’t happy with some of the advice they were receiving from the CPA relating to 2017 year-end tax planning along with the lack of general advice on business expenses like the business use of their vehicle, etc. The doctor wanted to know if they could engage me to review the year-end plan the CPA developed and if necessary, have another year-end tax planning session with us.
We reviewed the information the client provided that included the CPA notes regarding the 2017 income tax liability and possible steps the doctor could take to minimize the tax bite. There weren’t many action steps at all and quite frankly, the expenses were thin on deductible items like the business use of a vehicle, meals, entertainment, convention/meetings, and travel expense etc. However, that ISN’T the purpose of this article since something else of a larger magnitude jumped out at us when reviewing the doctor’s 2016 income tax returns.
You see, the doctor purchased the practice towards the end of 2016 so they had approximately $175K in wages as an associate so the CPA firm took full advantage of the initial purchase deductions like sec 179, dental supplies, etc. so that the taxable income for the doctor for 2016 was just below zero and the doctor got ALL of the taxes back that they had withheld from their wages. Naturally, the doctor was thrilled to death about that, who wouldn’t like to get these HUGE tax refunds, right?
Here’s the problem, this doctor has itemized deductions and personal exemptions, many of which became worthless deductions in 2016 or at best, they saved the doctor maybe $8K instead of at least $12K, so a cost to the doctor of $4K. The same goes for the full sec 179 deductions, this $120K deduction may have saved the doc approximately $20K instead of potentially as much as $40K, a cost to the doctor of $20K for a possible total cost to the doctor of approximately $24K.
You’ll see this in the summary below. For the two years as the tax returns were filed the total income tax liability was $116K while the total tax liability for the two years with proper planning is $125K. “Wait, what?” you say, that’s $9K MORE that the doctor is paying between those two years….and you’re correct.
Here’s the kicker though, with proper planning the doctor should have only taken approximately $35K of sec 179 deductions leaving them with $85K available for future years. That $85K deduction at the 33% income tax bracket is worth $28K in additional tax savings and when you net that against the additional tax cost of $9K for the first two years you’ll see the savings could have been $19K.
In all, considering a few other planning opportunities that were missed in 2016, we believe this CPA COST this doctor approximately $25K in taxes. That’s HUGE in my book and something that is completely avoidable with proper planning and advice. Fortunately, with proper year-end planning for 2017, we were able to reduce the doctor's federal tax liability by around $30K from where they were with the other CPA.
Proper planning doesn’t stop at closing, buyers need to make sure they get proper planning well after the deal is done.
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About Tim Lott
Tim Lott, CPA, CVA has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator on Dentaltown.com. You can reach Tim at firstname.lastname@example.org or any of the other dental partners/principals at (800) 772-1065 or email@example.com. For more blogs, visit our Dental CPAS blog page.