Are you a sitting duck? 

Is your defense strong enough? 

Are you up for a fight?

Thwarting cyber thieves

Generally, one of the requirements for maintaining a corporation’s existence (and the liability protection that it affords) is that the shareholders and Board of Directors must meet at least annually. Although most people view this requirement as a necessary evil, it doesn’t have to be a waste of time. For example, in addition to being a first step in making sure the corporation is respected as a separate legal entity, an annual meeting can be used as an important tool to support your company’s tax positions.

Besides the election of officers and directors, other actions that should be considered at the annual meeting include the directors approving the accrual of any bonuses and retirement plan contributions, and ratifying key actions taken by corporate officers during the year. It is common for the IRS to attack the compensation level of closely held C corporation shareholder/officers as unreasonably high and, thereby, avoiding taxation at the corporate level. A well-drafted set of minutes outlining the officers’ responsibilities, skills, and experience levels can significantly reduce the risk of an IRS challenge. If the shareholder/employees are underpaid in the start-up years because of a lack of funds, it is also important to document this situation in the minutes for future reference when higher payments are made.

The directors should also specifically approve all loans to shareholders. Any time a corporation loans funds to a shareholder, there is a risk that the IRS will attempt to characterize all or part of the distribution as a taxable dividend. The primary documentation that a distribution is intended to be a loan rather than a dividend should be in the written loan documents, and both parties should follow through in observing the terms of the loan. However, it is also helpful if the corporate minutes document the need for the borrowing (how the funds will be used), the corporate officers’ authorization of the loan, and a summary of the loan terms (interest rate, repayment schedule, loan rollover provisions, etc.).

A frequently contested issue regarding a shareholder/employee’s use of employer-provided automobiles is the treatment of that use as compensation (which is deductible by the corporation) vs. treatment as constructive dividends (which is not deductible by the corporation). Clearly documenting in the corporate minutes that the personal use of the company-owned automobile is intended to be part of the owner’s compensation may go a long way in ensuring the corporation will get to keep the deduction.

If the corporation is accumulating a significant amount of earnings, the minutes of the meeting should generally spell out the reasons for the accumulation to help prevent an IRS attempt to assess the accumulated earnings tax. Also, transactions intended to be taxable sales between the corporation and its shareholders are sometimes recharacterized by the IRS and the courts as tax-free contributions to capital. Corporate minutes detailing the transaction are helpful in supporting a bona fide sale.

As you can see, many of the issues raised by the IRS involve the payment of dividends by the corporation. (The IRS likes them — the corporation doesn’t.) To help support the corporation’s stance that payments to shareholders are deductible and that earnings held in the corporation are reasonable, corporate minutes should document that dividend payments were considered and how the amount paid, if any, was determined. Dividends (even if minimal) should generally be paid each year, unless there’s a specific reason not to pay them — in which case, these reasons should be clearly documented.

These are just a few examples of why well-documented annual meetings can be an important part of a corporation’s tax records. As the time for your annual meeting draws near, please call us if you have questions or concerns.

Make no mistake; dentistry is one of the most overhead-intensive professions. According to Dental Economics Magazine, overhead as a percentage of practice revenue runs upwards of 73 percent for the average American dentist. 

Untamed, this “cost of doing business” can take a big bite out of net profits, making practice owners feel they are not earning enough for their efforts.

Of course, you could ramp up production. But that requires working harder. 

Or, you could take steps to tame your overhead. Here, the idea is that a dollar saved in practice expenses is a dollar earned. With that in mind, consider how you can reduce costs in these key expense categories:

Supplies – If you look, you’ll probably find the overhead beast lurking in your supply room. Are you using disposable safety glasses and bite blocks for X-rays? Supplies that can be sterilized and reused might be a more cost-effective alternative. At the same time, review supply costs in terms of a desired percentage of production. For example, if you want to keep dental-supply costs within a range of 4 to 5 percent — and you produced $30,000 last month — your cost of supplies should not have exceeded $1,200. Use $1,200 as your target amount for the next month, and track your progress.

Lab Costs – Cost isn’t the only factor in working with a dental lab. The critical question really is whether the lab provides quality products that you don’t have to send back for adjustment again and again. Likewise, are the lab fees reasonable in terms of the revenue you generate for the procedure?

Staffing – Nothing drains overhead like poorly performing staff. Make sure you’re getting value for the salaries you pay. That starts with investing time and money in the training your staff needs to perform at the top of their game. You can also look at shifting some portion of salary (which is a fixed overhead expense) and making it a variable, performance-based expense. With a production-based bonus system, for example, salaries increase only when staff members work harder and more efficiently.

Occupancy — Are you paying rent at a reasonable rate for your location? With communities and demographics changing so rapidly, it might be smart to only commit to a lease for 5 years or less — and negotiate for extension options. At the end of the lease you could determine if the location of the office is still attractive. 

The bottom line is that when you cut overhead, you increase your take-home profit — day after day, year after year. Take the time to review your financial statements and analyze overhead costs at least quarterly and annually. 

Contact our office today for help in getting a handle on your current practice overhead, as well as establishing target overhead percentages. 

Balancing act

Dividend double-taxation

Other business structures

Red flags, higher taxes

Other interested parties

Best practice

Adapting to the times – Estate planning focus shifts to income taxes

Until recently, estate planning strategies typically focused on minimizing federal gift and estate taxes, with less regard for income taxes. Today, however, the estate and income tax law landscape is far different. What does this mean for estate planning? For many people — particularly those who expect to have little or no estate tax liability — it means shifting their focus to strategies for reducing income taxes. 

Changing estate tax law

For many years, the combination of relatively low estate tax exemption amounts and high marginal rates could easily devour more than half of an estate’s value. Popular estate planning techniques often had income tax implications, but in general any income tax consequences were eclipsed by the estate tax savings.

Now that has changed. For one thing, since 2001, the federal exemption has grown from $675,000 to $5.45 million. And, unlike before 2013, the exemption isn’t scheduled to drop in the future. In fact, it will continue to gradually increase via annual inflation adjustments. Estate tax rates have also decreased significantly, from 55% to 40%. And the 40% rate has no expiration date.

For many people, this new gift and estate tax law regime means federal gift and estate taxes are no longer an issue.  

Income tax matters

At the same time that potential gift and estate tax liability has disappeared for many, individual income tax rates have increased. In 2001, the top federal income tax rate was 39.1%, substantially lower than the top federal estate tax rate of 55%. Now the top income tax rate has grown to nearly as high as the current top estate tax rate.

Taxpayers with taxable income of more than certain annually adjusted levels (for 2016, $415,050 for single filers, $441,000 for heads of households, and $466,950 for joint filers) are now subject to a 39.6% marginal rate. 

Capital gains rates also have increased. Currently, the top rate is 20% (up from 15%) — 23.8% for taxpayers subject to the Affordable Care Act’s 3.8% net investment income tax (NIIT). It applies to certain net investment income — including dividends, taxable interest and capital gains — earned by taxpayers whose modified adjusted gross income tops $200,000 ($250,000 for joint filers, $125,000 for separate filers). The NIIT thresholds aren’t annually adjusted.

Fortunately, many estate planning strategies are available that can help reduce income taxes. Consider the family limited partnership (FLP). A properly structured and operated FLP allows parents to shift income to children or other family members in lower tax brackets by giving them limited partnership interests. But watch out for the kiddie tax, which can undo the benefits of income shifting if you transfer FLP interests to dependent children under the age of 19 (age 24 for certain full-time students).

Tax basis planning

The heightened importance of income taxes also means that there may be an advantage to holding assets until death rather than giving them away during your life. If you give away an appreciated asset, the recipient takes over your tax basis in the asset, triggering capital gains taxes should he or she turn around and sell it. 

When an appreciated asset is inherited, on the other hand, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. So, from an income tax perspective, there’s an advantage to retaining appreciating assets until death rather than giving them away during your lifetime.

For those with large taxable estates, however, this advantage may be outweighed by estate tax concerns. From an estate tax perspective, it’s preferable to remove appreciating assets from your estate — through outright gifts or contributions to irrevocable trusts — as early as possible. That way, all future appreciation in their value will be shielded from estate tax. 
If your net worth is safely within the estate tax exemption, retaining assets until death will minimize the impact of built-in capital gains on your heirs. Alternatively, if you want to share your wealth with your children or other family members, consider using an estate defective trust, which provides current income to your beneficiaries without removing the trust assets from your estate. (See below under “Have your cake and eat it.”)

Charitable planning

Higher income taxes can also have a big effect on charitable giving strategies. If your estate plan includes charitable bequests, for example, it makes sense to fund those bequests with assets that otherwise would generate “income in respect of a decedent” (IRD).

IRD is income that a deceased person earned but never received, such as IRA or qualified retirement plan distributions. Unlike other inherited assets, which are income-tax-free to the recipient, IRD assets can trigger a significant tax bill. But you can avoid these taxes by donating the assets to charity.

If your estate is within the exemption, it’s preferable to make charitable gifts during your lifetime. This is because, if you have no estate tax liability, charitable bequests won’t yield any tax benefits. But lifetime donations can generate valuable income tax deductions.

Do the math

Identifying the right estate planning strategies for you and your family is in part a matter of running the numbers. Projecting your income and estate tax liabilities — including state as well as federal taxes — will help you determine whether it’s better to focus on reducing estate taxes or income taxes.

Reposted from AICPA Insights, January 25, 2016 Post by James B. Jordan, CPA, CGMA

Contributions – whether by cash, check, or online giving – are the lifeblood of faith-based organizations. Many do not realize how often these donations get into the wrong hands.

There are primarily two types of theft that occur in faith-based organizations –larceny and skimming. Larceny occurs after the money has been counted, deposited, and recorded in the books of the organization. Skimming occurs when donations never get logged in the books; that is, they go missing before ever being recorded. It is the counting and depositing process that opens the organization up to skimming, and that is where fraud can be most difficult to detect. 

Faith-based organizations need to take steps to ensure that contributions make it into the bank in the first place. 

Read the full article  here

Stay on top of filing and reporting deadlines with our tax calendar! Our tax calendar includes dates categorized by employers, individuals, partnerships, corporations and more to keep you on track. 

Background

Impacts on lessees

• For capital leases, lessees will amortize right-to-use assets separately from interest on the lease liability on the statement of comprehensive income. They will classify repayments of the principal portion of the lease liability within financing activities, and payments of interest on the lease liability and variable lease payments within operating activities, in the statement of cash flows.
• For operating leases, lessees will recognize a single total lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. They’ll classify all cash payments within operating activities in the statement of cash flows.

Impacts on lessors

Combined contracts

Interplay with international standards

Effective dates and transition

Act soon if you have extensive lease portfolios

When reviewing financial statements, nonprofit board members and managers sometimes make the mistake of focusing solely on bottom-line figures. But financial statements also may include a wealth of information in their disclosures.

Savvy constituents and potential supporters know this and will examine the notes to your financial statements to gain a sense of how well your organization is pursuing its mission. This means that you, too, need to be familiar with the common types of disclosures and the information they make available for scrutiny.

What’s in your accounting policies?

The summary comprises two sections: a brief description of your nonprofit (including its chief purpose and sources of revenue) and a list of the main accounting policies that have been applied in preparing your financial statements (with a subsection for each specific policy). A policy is generally considered significant if it could materially affect the determination of financial position, cash flows or changes in net assets.

The summary outlines specific policies such as:

• The accounting method used in the financial statements (accrual, cash basis or modified cash basis),
• Classification of cash equivalents,
• Fixed asset capitalization and depreciation,
• Investments,
• Uncertain tax positions,
• Recognition of contributions and grants as revenue, and
• Recognition of in-kind contributions.

The disclosure of accounting policies should describe accounting principles and methods that have been selected from acceptable alternatives, and explain industry peculiarities or unusual or innovative applications of Generally Accepted Accounting Principles (GAAP).

How are your investments performing?

Nonprofits must disclose in the notes a variety of information related to investments, beginning with the types of investments, such as equities, U.S. Treasury securities and real estate. Among other information, the notes must disclose the carrying amounts for each major type of investment, current year income, realized and unrealized gains and losses, and information about how fair value is determined.

Have you had related party transactions?

Constituents may look to the related party transaction disclosure to determine if the not-for-profit is susceptible to conflicts of interest. The note describes transactions entered into with related parties such as board members, senior management and major donors. The description should include the nature of the relationship between the parties, the dollar amount of the transaction and any amounts owed to or by the related party as of the date of the financial statements, and the terms and manner of settlement. Guarantees between related parties also must be disclosed.

What about contingencies?

The not-for-profit must disclose any reasonably possible loss contingencies. Contingencies are existing conditions that could create an obligation in the future but arise from past transactions or events. Constituents may find loss contingencies of particular interest because of their potential effect on financial position and net assets. The financial statement notes must disclose the nature of the contingency and provide an estimate of the loss (or state that an estimate can’t be made). In certain circumstances, gain contingencies also may need to be disclosed.

Examples of nonprofits’ contingencies include:

• Pending, threatened or unasserted litigation, claims and assessments,
• Claims for costs or expenditures that could be disallowed under a government grant,
• Current IRS examinations related to tax-exempt status, unrelated business income, excise or other taxes, and
• Arrangements with financial institutions, such as guarantees and endorsements.

Contingencies related to noncompliance with donor restrictions also should be included in the disclosures.

What were your fundraising costs?

Contributors, funding sources and regulators tend to be more interested in total expenses by function, such as fundraising costs, than expenses for line items like professional fees, postage and supplies. Nonprofit financial statements should disclose information that allows users to compare the total amount of fundraising costs with the related proceeds and total program costs. If a ratio of fundraising expenses to funds raised is disclosed, the organization also should describe the method used to compute it.

What’s behind the numbers?

Bottom-line numbers don’t always tell the whole story of an organization’s financial health. Board members and management need to follow the lead of their savvier constituents and take the time to read the disclosures so they know the facts behind the figures and can plan for their organization accordingly. 

Second in a series

The shift is on as healthcare providers are increasingly being incentivized to provide high-quality care at a lower cost.

Ultimately, the goal is delivery of healthcare that provides patients with:

– the best outcomes,
– from the most appropriate treatment, 
– by the right kind of provider, 
– at the right time, and
– in the most appropriate setting.

Under a value-based payment model, physicians are rewarded for good work — not just good workloads. Current value-based payment models include:

Bundled Payments — One payment is made for the entire range of services provided around a particular episode of care. Payment is typically paid to one entity (e.g., a hospital), which then pays the participating physicians from that bundle.

Shared Savings Arrangements — A physician is rewarded if patients have better-than-average quality/cost outcomes, and is penalized for excessive costs and poor outcomes.

Value-Based Payment Modifier — The Value Modifier provides for differential payment to a physician or group of physicians under the Medicare Physician Fee Schedule (PFS) based upon the quality of care furnished compared to the cost of care during a particular performance period. 
 

7 Things to Consider

As providers consider entering into value-based and/or risk-sharing arrangements, they will certainly need to focus on the details. In particular, physicians are well advised to evaluate these critical factors: 

1. Risk — What is your financial risk exposure? Does the payment model offer protection by limiting your total risk exposure? Just as important, does the plan penalize you for factors outside of your control? 
2. Reward — Does the contract include appropriate rewards for achievement of performance goals? Will you be given credit for quality achievements outside of stated performance goals?
3. Distribution — How will bonuses from any shared savings be distributed? Are the shared savings distributed equitably between all of the stakeholders? Any agreement should spell out how allocations will be made to each provider (e.g., through utilization and outcome measurement).
4. Performance Goals — Are performance goals set at reasonable levels — and can they be achieved within the current care setting? Just as important, will you have the ability to help establish the goals and measurement criteria?  Does the contract allow for innovation in care approaches?
5. Measurement — Are required tools and processes already in place to accurately measure outcomes, identify at-risk patients and successfully report and monitor quality and cost data? How is that data communicated to the payer? 
6. Providers — Shared savings and bundled payment arrangements typically cover the entire continuum of care — primary care, acute care and post-acute care services. Are the right providers in place for success? 
7. Liability — Traditionally, physicians have been able to accept or refuse to treat a patient or a group of patients, as well as choose physicians or other healthcare professionals with which to collaborate. Is there any additional risk associated when participating with other organizations or physicians? Does the contract limit your ability to do what is right for the patient?

The Payment Train Has Left the Station

It is estimated that in the next 10 years, 50 percent of physician compensation will come from value-based care payment models. Physicians who  think through the issues and opportunities now will be better prepared for success in the value-based world. 

Value-based care is a complex issue requiring careful analysis of its potential impact on physician practices. Please look for our continuing blog articles on this topic.