#857: Tax Strategies to Prepare for an Associate Buy-In

The Dental A Team Podcast

Morgan Hamon returns to the podcast and Kiera dives deep with him. They focus on how owners/doctors can prepare their cash flow and tax planning for an associate buy-in, including the ideal time to execute, time horizon, three common frustrations and how to avoid them, and so much more.

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Transcript:

Kiera Dent (00:00.686)

Hello, Dental A Team listeners. This is Kiera and I am so excited. This is one of my favorite guests. He's been on the podcast a couple of times because I felt like I really did not understand my numbers for a long time as a business owner and I felt very dumb. And my first year on taxes, I got like literally my shorts burned so bad with taxes. And Morgan Hamon, owner of HTA accounting, is one of the top accounting companies that I refer to.

They're dental specific. I'm obsessed with it. The office is working with them because I know their numbers are clear. I can read the reports. I know what their profitability is. They're looking at it. So Morgan, welcome back to the show today. How are you?

Morgan (00:37.562)

Thank you, Kiera. Always a pleasure to be here. Appreciate it very much. And we're all doing great.

Kiera Dent (00:44.047)

Good. Well, I know you guys just finished up taxes. So April, I know you go clear till September. Morgan, help me understand. Why do people ever do an extension? Is it just because they don't have like the cash of it? Like, what is the benefit of doing an extension? I just need to know this for my own personal satisfaction because I don't know.

Morgan (00:58.554)

the extension, there's really no, I would say, benefit of doing an extension. Part of it is just kind of realistically looking like what can be done during the first few months of the year. And so extensions are pretty normal. And just so everybody knows, the IRS really doesn't care. The extensions are automatic, no questions asked, no adverse consequences. And truth be told, they really don't care.

The IRS really doesn't want every tax return by April 15th. They can't process it. They can't process what they get by April 15th. So, being able to extend the personal returns out to October 15th and the personal returns out to September, or the corporate returns to September 15th actually helps the IRS. They really don't care. Why the April 15 deadline is important is because that's when the IRS wants their money. So, and that is a common misconception.

Kiera Dent (01:50.542)

Yes.

Morgan (01:53.114)

that the taxes do April 15 or do when you file the tax return. Both of those are incorrect. The truth is the IRS, they want paid as you earn the money during the year is the truth, which is why if you're a W -2 employee, you have mandatory wage withholding. And if you're a business owner, you're supposed to send in some estimated payments during the year to pay that in so that by the end of the year,

substantially paid in and then doing the tax return is more of a paperwork drill than a cash call, ideally. But that's why extensions exist, how they work. Just realistically speaking from an accountant's point of view, if people are wondering, why is my return on extension? Well, part of it is just understanding the workflow. So,

As everybody hopefully knows, if you own a dental practice, you're almost sure to have what's called a pass -through entity, whether that's a sole proprietor, an S corporation, or a partnership. And what that means is the practice itself does not pay income tax. The profit realized by year end passes through to the personal tax return and you pay your tax personally. So before we can do a personal tax return, the business tax return has to be done.

Kiera Dent (03:11.246)

Mm -hmm.

Morgan (03:23.322)

And when the business tax return is done, it's not that the business then owes taxes. It's just the math. You collected this much money, deducted all these expenses, it leaves this profit left over. The corporate return deadline and the partnership return deadline is March 15. And here, that's absolutely absurd because the year -end accounting is very extensive.

Kiera Dent (03:41.39)

Okay. Yeah.

Morgan (03:51.002)

any loan document that hasn't been provided yet has to be tracked down. If there's any payroll discrepancies, those have to be figured out. Everything has to be done in January, including sending out 1099 install applicable vendors. So realistically speaking, not only for us, but any professional firm that's doing a thorough job, completing December and year end really takes the whole month of January, which means that neither us or any other firm out there can really start

Kiera Dent (04:05.102)

Mm -hmm.

Kiera Dent (04:15.694)

Right.

Morgan (04:20.89)

doing business returns until the 1st of February. February 1 to March 15, that's six weeks. Can you see 100 % of your patients in six weeks?

Kiera Dent (04:23.47)

Mm -hmm.

Kiera Dent (04:27.758)

Cool.

Kiera Dent (04:33.646)

I mean, you know, their startup maybe.

Morgan (04:36.218)

We're an established practice, right? You can't do... And so, for us, we can't do a year's worth of business tax returns in six weeks. So those are going to be on extension, which is then going to push the personal returns on extension. Keep in mind, an extension doesn't mean September or October. If you do a personal tax return like April 16, it needs to be on extension. Well, it's just a little extra time. So...

Kiera Dent (05:00.302)

Gotcha.

Morgan (05:03.706)

That's probably the really long answer to your question, but that's how they work.

Kiera Dent (05:06.734)

I like it.

Okay, well that was for my own personal knowledge for all of you here. Welcome. Morgan is, I think just the more we're educated as business owners because I feel like every year tax feels like the game of monopoly. And I just feel like there's like so many more rules that if I wish I would have known them, I could have been better educated. So I feel like Morgan, a couple of things that people really are struggling with that I'm hearing that I'd love to dive in, like let's learn some more rules to the game of tax. And I...

Morgan (05:24.602)

Mm -hmm.

Kiera Dent (05:38.798)

I did have to change my mind. I realized that tax is kind of a fun game for me and how can I maximize and minimize my taxes? How can I just be smarter and better educated, which is why I love podcasting with you, which is why I love having people work with you as clients. And I think having a really good dental specific CPA is vital because like Morgan, you work with so many practices. You can see the trends. You can help people know better, but let's talk about associates wanting to buy in. How does that impact our taxes? How does that impact?

because how does that impact what we're paying, our payments to ourselves? Can you just kind of walk us through associates buying in that?

Morgan (06:13.23)

You bet. It's one of those topics where if a client emails and says, hey, I got my longtime associate. I'm thinking about bringing him as a partner. That is always going to result in an appointment with me, right? Because you can't go over email. We have to talk about it. It's complex. So I think the biggest key takeaway, if somebody has a longtime associate,

Kiera Dent (06:36.174)

Mm -hmm.

Morgan (06:43.226)

they say, you know, I want to bring them in and have a business partner. First off, I'm a fan of that. That's how we're structured. You know, I have two wonderful business partners, many advantages to that. But I think before we even start talking about how that is done, like first and foremost, it's really important for that doctor to understand that when you have a partnership, you know, does...

Kiera Dent (06:49.966)

Mm -hmm. Mm -hmm.

Morgan (07:09.882)

with all those benefits that go along with that, there's also some additional cost. The structure has to change. And so there's going to be more entities, so your compliance costs also go up. And things just get a little more complicated. So if somebody is wanting to buy into a practice, there's a particular way that that needs to be structured so that...

moving forward, both doctors can take advantage of tax saving strategies. The buyer buying in can actually deduct the cost of what they're buying in, of their buy -in. And there's ways to flow the money so that when we get into those tax deductions, they're all done at a personal level rather than the partnership level. So if one partner wants to buy a Cadillac Escalade and the other partner is cool with their, you know,

Kiera Dent (07:48.11)

Mm -hmm.

Kiera Dent (08:06.702)

Thank you.

Morgan (08:09.722)

Prius or whatever, like that cost difference, that needs to be at the personal entity level rather than the partnership level, so you don't have to negotiate that. So any time a partner buy is in, it requires a significant restructure. It takes a lot of time. There's going to be more entities. You have to be more disciplined about how the money flows, and there's more tax returns to do that there just is. So that's the big picture of what's involved.

Kiera Dent (08:24.43)

Mm -hmm.

Kiera Dent (08:33.71)

Mm -hmm.

Morgan (08:38.17)

And I would say if I'm visiting with a client and they're thinking about this, January 1 is the ideal time to execute. And I would say, in the time horizon, in my opinion, at least six months to plan.

Kiera Dent (08:39.862)

Thank you.

Kiera Dent (08:46.99)

Okay.

Kiera Dent (08:54.318)

Okay.

Morgan (08:56.89)

So that's the overview. I wasn't sure how much details you wanted to go in with structure.

Kiera Dent (08:59.246)

Mm -hmm. Yeah. Well, I think I want to know a couple of things. I think it's really helpful. And January 1, so I have a few questions. One is, like, I just had you and I have a mutual client, and they're going through this. And for a year before the associates going to buy in, I actually had the owner doctor.

Morgan (09:16.442)

Mm -hmm.

Kiera Dent (09:21.902)

start running and we worked really hand in hand together of having that owner doctor start to almost feel what it will feel like to change their paycheck. Because I don't think people realize how much flows through the company of personal expenses. And so what do you recommend for doctors to set themselves up for an associate to buy in? Because like, well, yes, their monthly paycheck is going to shift, they will be getting a lump sum of cash potentially with the buy in. And so it's one of those things, but I feel like people are so used to their monthly pay.

as opposed to a large sum. How do you recommend owner doctors start to prepare for this associate to come in with cashflow, with taxes, so they can just be, I think, mentally and emotionally prepared for that change when that associate buys?

Morgan (09:51.866)

Mm -hmm. Yeah.

Morgan (10:03.066)

You bet. So in almost all these cases, including the doctor we're talking about, they have, it's almost always, it's a very successful, larger, single owner operated dental practice, which is classified as an S -cooperation. So single owner S -cooperation. The reason it's classified as an S -cooperation is because that helps manage the self -employment payroll tax burden for that owner.

Kiera Dent (10:14.446)

Thank you.

Morgan (10:30.778)

And how that works is the owner takes a reasonable W2 owner salary. Now that owner salary is not a measure of what they're worth, what they produce, anything. We are setting that salary at a reasonable threshold. So they pay in a reasonable amount of payroll taxes. And then when you take profit distributions from an S corporation, the owner just takes home the leftover cash every.

Kiera Dent (10:37.39)

Mm -hmm.

Morgan (10:57.914)

Those are not subject to self -employment payroll taxes. And that's where the magic happens with a single owner S -Corp. Perfect structure for single doctor practice, doing well, enjoying some success. And so the pay they're used to, Kiera, is kind of a very modest W2. And they're entitled to all the leftovers, right? A month end, a quarter end. And we like to see lots of those. That's why we undertake this journey of business ownership. There should be lots of healthy distributions. So when a partner comes in,

Kiera Dent (11:01.998)

Mm -hmm.

Kiera Dent (11:15.63)

Right.

Morgan (11:26.394)

or someone buys in, things change. One question is, why can't I just have the doctor buy half my S -Corp? I guess it should be easy, right? Just come in and check for half and let's just keep one entity and then we don't have to like do anything more and all this complicated stuff Morgan's talking about. If a doctor buys stock in an S -Corp, you can't deduct stock there any more than you can deduct the cost of buying mutual funds on.

Kiera Dent (11:38.83)

Mm -hmm.

Kiera Dent (11:51.278)

Yeah, exactly.

Morgan (11:51.482)

Charles Schwab, right? It's non -deductible for the buyer. So if they're ponying up 700 grand to buy half of a big dental practice, like it's really a bad deal for the buyer if they can't deduct that. So that's like big issue number one. Big issue number two is if two doctors are sharing a single S corporation, they can set the W -2 however they want, but...

Kiera Dent (12:04.91)

Mm -hmm.

Morgan (12:19.482)

with an S corporation at your end, the profit distributions, the dollars distributed must exactly equal, like be proportionate to ownership percentage, like exactly to the rules. So when two unrelated doctors work together, they usually have a component of their pay based on what their collections are, right? To keep things equitable. The only way to true out any differential and pay in this situation would be to change the W -2. And the more you crank that salary up,

Kiera Dent (12:27.726)

Mm -hmm.

Kiera Dent (12:45.494)

Yep.

Morgan (12:48.346)

because some doctor has higher production, the more money you're paying in payroll tax starts destroying the S -Corp. But it gets even worse because what happens? One doctor wants to buy a new Ferrari and the other doctor says, I've got three kids, I'm cool with my minivan.

Kiera Dent (13:07.726)

Mm -hmm.

Morgan (13:09.498)

You can't share though. There's no true up. Because sometimes they say, well, you'll just take an extra distribution to kind of true up the cost. You can't do it with an S Corp. So it makes virtually all these things that can be done to minimize tax bill as a business owner, all those tax strategies become extraordinarily difficult, if not impossible, when you share. So for those reasons, just buying half an existing S Corp is a non -starter. You should not do it. We've had clients.

where they're set up that way when they come to us and it's just, they have all those frustrations, those three frustrations I just mentioned, they exist. So what to do then? We can't do that. Like my recommendation is you set up a brand new PLLC, now in, or in California, a partnership. And that'll be taxed, or classified as a partnership.

Kiera Dent (13:47.246)

Yeah.

Morgan (14:08.506)

And so the day of closing, so let's say we're going to do it January 1, the doctor with their existing S -Corp, they're going to sell, let's say it's a 50 % buy -in, they're going to sell 50 % of the fixed out, the equipment and the goodwill to this other doctor. They're going to place that in their own entity they have set up, which leaves half of what was left in the original entity. And both doctors then can contribute those to this new partnership. And then both doctors hold their interest in that partnership in their own personal entities.

Kiera Dent (14:37.774)

Thank you.

Morgan (14:38.17)

So now there's three entities instead of one. Now with a partnership, the doctors can slice it and dice it however they want. You want to do a monthly payment based on production, knock yourself out, cut checks, and those go to the personal entities. And then at the end of the quarter, end of the month, end of the quarter, if they want to split the leftovers per ownership presented percentages, those go to the personal entities. And that way in the partnership is super clean.

Kiera Dent (14:52.362)

Thank you.

Thank you.

Morgan (15:04.762)

There's no cars, there's no home office, there's none of that in the partnership. It's all just very, very clean. And then from each doctor's personal S corporation, they will take a reasonable W -2 salary to save money on payroll taxes like we just described. But then in their own entity, they can do the car and the home office and take their board meeting and do all the items on the checklist and get all those tax savings. And it doesn't matter what the other partner's doing. Like it's completely separate.

There's no drama, there's nothing to negotiate or chew up. So, and it's perfect. And that's how HD accounting group is structured. It is a PLLC classified as a partnership. I hold my interest in Morgan K. Hamon, LLC. I do whatever I want in my entity. Courtney does what she wants in her entity. Ken does what he wants in his. And we just, we do our own thing. And the partnership is super clean. It is only business expenses, you know, for.

Kiera Dent (16:00.878)

So then, do you guys set up for like you own, here's the HDA, we'll say this is the dental office up at the top. You guys have your own individual ones. It's almost like a DSO structure is what it feels like to me. But like with the profits up there, everything goes through. We can't deduct our own personal things that'll come out of our own S -Corp. So which is fine. But up here, it's basically just like true overhead. Do you put the doctors as part of that overhead of their production and pay them on production?

Morgan (16:08.538)

Mm -hmm.

Morgan (16:14.682)

Mm -hmm.

Morgan (16:18.874)

Mm -hmm.

Kiera Dent (16:28.814)

or do we just pay the W -2 salaries? What do you recommend for that? Pay on production or what do you do?

Morgan (16:31.898)

Well, first off, at that partnership, right, that top company, the doctors are not on W -2. And that is one of the really important action items. If a client's undergoing this, hey, when you set up that partnership, all the staff are going to go beyond the W -2, but not the partners. A typical agreement that we see is every month there will be a payment to the partners.

based on collections attributable to their efforts. So they're going to pull that out at Dentrix Curve Open Dental. And they're going to work that out internally and say, hey, you had these collections, I had these collections. And then they're going to have a uniform percentage. And it'll typically be a little bit lower than an associate because we don't want to believe that the practice dry cash.

Kiera Dent (17:05.55)

Mm -hmm.

Kiera Dent (17:26.382)

where.

Morgan (17:27.834)

And it should be based on collections rather than productions, because as mutual owners, they have a shared responsibility to make sure the practice is collected money. So maybe it's 25%, 30 % of collections attributable to each doctor's effort. And that's a monthly payment that goes to the personal S corporation. The terminology for that is technically called a guaranteed payment from a partnership. And that sounds a little silly, because we all know there's no guarantees in life, but that's what it's called. So it's not W -2. It is a check that gets cut from the partnership.

Kiera Dent (17:34.606)

Mm -hmm.

Kiera Dent (17:49.198)

Okay.

Okay, good to know.

Morgan (17:57.754)

to the personalized score. So that's monthly. Now we get to the end of the quarter and these two doctors have spoken and they say, you know, at the partnership, our break even, and we calculated a true break even, right? The break even before anything goes to the doctors, we've covered all the expenses plus debt service. The true break even is let's say it's 80 ,000 a month. And they say we've talked and we're about 150 would be, is like the cashers are weak, we can sleep at night. We're calm.

Kiera Dent (17:59.278)

Okay.

Morgan (18:28.378)

So at the end of the quarter, there's 200 grand in the operating account. Their mutually desired cash reserve is 150, so they each cut a check for 25 each. And that's a check that goes directly to the personalized corp. So money is going to accumulate in that personalized corp from there. That's how the doctor takes the money home. They take their reasonable W -2 paycheck that we would help calculate. That paycheck is not going to pay all their bills. They're going to take lots of distributions out of their personalized corp. And then pay the card, home office, and door.

Kiera Dent (18:52.974)

Gotcha. What do you do? Because usually in a partnership, there's a spender and a saver. I think the same thing in a relationship. So what happens with the distributions? Because I've seen with a lot of associates and partners that one wants to take distribution sooner than the other. How do you set that up? Because I do feel like sometimes that's a sticking point. How do you recommend setting that up between partners?

Morgan (19:01.466)

Mmm.

Morgan (19:12.282)

Yeah. It's the, what we'll call it. So yeah, it is a relationship that's everything like accounting is a relationship business being in business, being partners as a relationship business. So with a partnership, you need a prenup and that's called the operating agreement. And I tell folks you look, you need a, you need a really savvy attorney that works with a lot of dentists because they're not only going to set up these entities and do the asset purchase agreements, but you need a very well -written strong.

Kiera Dent (19:22.094)

Okay.

Morgan (19:42.626)

operating agreement for the partnership where you agree on all of this ahead of time. How are we going to quantify the cash reserve? What is going to be our savings reserve? What percentage are we going to use to pay? You got to sort all that out. You have to identify, well, what happens if someone gets hurt or disabled? What if they get divorced? What if, heaven forbid, they pass away? All of that has to be outlined in the partnership agreement. What happens if you decide you don't like being partners?

Kiera Dent (19:46.67)

Mm -hmm.

Morgan (20:13.306)

Like that has to all be lined out ahead of time. So you don't have to negotiate that. So that's the answer, Kiera, is it's all negotiable, but it needs to be set in stone in that partnership operating agreement prior to day one. I mean, they got to agree to that going into it.

Kiera Dent (20:34.67)

So I agree with you. And I always tell everybody like, you need to plan the divorce before you get married. Like, what does this look like if we break up? Because in a couple of partnerships I was in, I wish I would have known facts and details because I would have made different decisions differently if I would have known the outcomes of those. But like, you get into it, which is why I agree. Have a really good dental attorney draft this who's seen it because the more exposure you get, the more you know what issues will come up.

Morgan (20:55.706)

Okay.

Kiera Dent (21:00.43)

But Morgan, what do you recommend is healthy? Like from a tax savings point, because my husband and I, I mean, Morgan, if I could, I would just keep, like, I love to spend, but I also love to save. I'm a very unique individual. Most people are not like me. So I love to have all of my savings accounts, but I also like to spend money. My true fun game is I like order off Amazon to get the spend thrill. And then I go return to get my savings thrill. Like I'm this constant return girl. But what do you do? Like what is a healthy amount to have in your savings?

Morgan (21:23.194)

I'm sorry.

Kiera Dent (21:29.358)

as a partnership of a business? What is healthy of how often to do distributions? Just as like a general idea. So doctors going into the associate partnership relationship even have an idea of like what could be normal.

Morgan (21:38.65)

Mm -hmm.

So my personal opinion is that, and just to define terminology, I call it operating cash reserve. Some people might call that working capital, rainy day fund, whatever that is. It's sort of the minimum amount you want to have in your bank account at all times. And the reason you want that amount is at its core, you just to be able to pay your bills and not have to feel like you're juggling cash, right?

Kiera Dent (22:01.038)

Mm -hmm.

Kiera Dent (22:11.054)

Right.

Morgan (22:11.226)

So payrolls do the same week as the rent, same week as gotta pay the Shine bill. Like you can just pay it and not have to worry about it. In my opinion, that is somewhere between one and two months of a monthly break even point. For smaller practices, it tends to be a higher multiple. For larger practices, it tends to be a lower multiple. And the reason for that is, is,

you know, if you've got a really large practice and their breakeven is $180 ,000 a month, I mean, that ends up being a huge chunk of cash. You don't necessarily want to keep 400 grand in the operating account. So that's why you'll see the lower multiples. Ultimately, it's up to the owners and whatever the comfort level is. But I think if we were to just put some boundaries out there, minimum one month up to two months. That is not to say I have a client and a really good friend of mine, big practice.

Kiera Dent (22:47.95)

Right.

Morgan (23:07.418)

And they keep 100k breakage at a minimum. And in my opinion, that's a little skinny, just given the size of their operation. But you know what? It's up to them. It's whatever they want to do. So that's how we define that. And then.

Kiera Dent (23:15.79)

Yeah.

Kiera Dent (23:22.19)

But then do you also have to have a tax bucket or is, I guess it wouldn't be taxed because it would just be the money passes down to each entity, right? That's where it becomes individual.

Morgan (23:28.698)

This is really a good thing to bring up because, and this is where I'm going to reiterate where we started, the businesses don't pay income tax. It's just math.

So I'm just going to use a real simple example. Let's say it's a single doctor practice. It's a $1 .2 million office. And at the end of the year, you look at the collections that they collected during that tax year. That's all the expenses, the rent, the marketing, the staff, us, the bank fees, all that.

deduct the equipment, everything, and there's going to be a profit number at the end. That taxpayer owes income tax on that profit, regardless of whether they take it home or not. That number flows through. So with a partnership, what makes it confusing? So we've had a couple instances where it's a 50 -50 partnership. It comes time to do the quarterly tax plan. So we're looking at this ahead of time. And...

Kiera Dent (24:16.654)

Mm -hmm.

Kiera Dent (24:22.766)

for sure.

Kiera Dent (24:30.958)

Mm -hmm.

Morgan (24:38.298)

They'll each get their in tax planning, taxes are paid individually. The tax plan is prepared, delivered and discussed individually because everyone has their own situation. But for part, they'll get together and talk. And so we're doing say a Q3 tax plan and it's 50 -50. They do it right down the middle. It's all pretty similar. And then they'll get a tax plan and one doctor has a higher forecast tax liability and then the higher recommended estimated payment than the other. And they say, wait a minute, we're 50 -50.

Kiera Dent (25:06.286)

Mm -hmm.

Morgan (25:08.154)

Why am I paying more tax? Well, it's because that profit flows through to the personal tax return and one spouse, maybe they have, or one doctor maybe has a spouse who's a physician and makes $200 ,000 W -2. Well, their income gets added on to the partner profit. It puts them in a higher tax bracket, higher effective tax rate. Any time...

Kiera Dent (25:15.022)

Mm -hmm.

Morgan (25:35.642)

There's a spouse who is a high earning W -2 that are almost always under withheld significantly because wherever they work, their withholding tables are not including the practice owner's profit, right? So it's always under withheld substantially. So you have to make up for that with a higher quarterly estimated payment. So that's why there's the Delta in tax payments, right? Because when that liability hits the personal, you got to look at, wait, you got 12 Airbnb rental houses?

Kiera Dent (25:46.958)

their spots. Right.

Kiera Dent (26:02.638)

Thank you.

Morgan (26:04.282)

Okay, that's a lot of rental income. That's going to push you up. So it's very individual. Now, in terms of a tax bucket, if folks want to save for tax in a partnership, that's going to be at the personal S -corp level. Just hold on to the money there. Ultimately, when they write that check, it's a personal liability. And so the best thing to do, like when we're doing tax planning, we will look at year -to -date profit.

Kiera Dent (26:20.59)

Mm -hmm.

Morgan (26:33.37)

We know that for sure. We can look at that. And then if we're doing tax planning ahead of time, if you think about it, there's months in the year that haven't happened yet. And that's where tax planning gets hard. Because what do you put in those months? So we look at trailing four -month profit trends, and we forecast those out to December 31. We add the forecast to the year to date, and that gives us our annual profit just to do some tax planning ahead of time.

Kiera Dent (26:44.43)

Right. Mm -hmm.

Morgan (27:03.066)

And when we do that, we're calculating an effective tax rate. An effective tax rate is just total tax or total income divided by the tax paid is effective rate. And what that really means is if you go, if anyone were to go Google, you know, what are the tax income tax rates for 2024? You're going to see these different brackets ranging up to 37%. And those are, that's the law. That's reality.

but only your income within those brackets is subject to that percentage. And so when you average it out, you're gonna end up with what's called an effective tax rate. So if somebody is just, it's mid -year, we talked about, okay, it's mid -year, what should I be thinking about? Well, look at your last year's tax return. If there's a tax summary on there, which hopefully there is, ours have that, it'll tell you what your effective tax rate is. And you gotta look at federal and state. So if you're a federal,

If your federal effective tax rate is 29 % and you're here in Colorado and your effective state tax is like 4 .4%, just round that up, that's 35%. So whatever income you see you've earned during the year, just keep a third of it. Hang on to a third of it and just keep it handy. Now, hopefully you won't need the whole third. We get to your end.

Kiera Dent (28:09.198)

Mm -hmm.

Kiera Dent (28:15.342)

Yeah.

Morgan (28:25.306)

And in November, they decided we're going to pull the trigger finally and buy that Sarek we've been thinking about. Holy cow, $150 ,000 tax deduction overnight. 50 -50 partnership, each gets 75. That's going to lower it. But I would rather they're saving a third and maybe you don't need all of it. Yeah. And then whatever's left, it's their money. You can go do something with it. So.

Kiera Dent (28:41.646)

Agreed.

Kiera Dent (28:46.094)

That's what I say is the business owners tax return like over save and that's how we actually get our tax return. I agree. I think I'm much happier and I put mine in a high yield savings account and so I am earning interest on it, which technically I do need to report in which I do, but I love having it sit there and that's how I've done it for years and it's worked out really well. So I'm curious Morgan, that was really, really helpful and I appreciate you walking through that. Can a new owner, let's say this isn't necessarily an associate, it could definitely apply to like the partnership piece, but.

Morgan (28:49.53)

Hmm?

Morgan (28:53.242)

Mm -hmm.

Morgan (28:57.306)

You first.

Kiera Dent (29:16.59)

I just I met a doctor they purchased a practice this year and they were thinking about buying another Like they wanted to buy their mill and they want to buy all these things and I said I would chat with your CPA and find out if it makes tax sense to buy it this year to buy it next year and what other people that was at the conversation they said well can't dental practices roll through losses year after year and I have never known that I haven't asked that so I was like well Morgan's here I'm gonna ask him the question

Can you roll loss from year to year to year in a dental practice? Because I've never heard of that.

Morgan (29:48.73)

It depends on what the loss is. If you're electing to take section 179, which let's define that real quick, because everyone's heard of that. I'm like, what is that? So when you buy medical equipment,

Kiera Dent (30:00.75)

I don't know what it is. Again, here's the rules of monopoly. Tell us another rule Morgan.

Morgan (30:09.466)

The rules are that must be depreciated over five years. Now depreciation is another one of those terms. We're going to talk about that. It means you write it off. So if you go buy an order of dental supplies, you're going to consume that within 12 months. So you get to deduct the whole thing right away, like a dollar for dollar deduction. When you buy equipment, things are going to last with a useful life longer than 12 months.

Kiera Dent (30:20.014)

Mm -hmm.

Morgan (30:39.354)

The rules are that you must then take the deduction over that estimated lifespan. And the IRS has very standardized rules. They used to not have those, and then the IRS would fight with the taxpayers over what the useful life is. And so that was all standardized. And so now medical equipment, it's five years, period dot. And then it's accelerated depreciation. So you get your biggest bang for the buck, you're two, you're three.

Now Section 179 says, you know what, forget that whole five year deal. Let's do it right now. Let's do it right now. And that exists to encourage people to spend money on their business. So you buy this and then you can deduct it all right now. Well, depreciation, regular depreciation can create a loss, but Section 179 cannot.

Kiera Dent (31:20.31)

Mm -hmm.

Morgan (31:28.858)

If someone has an S corp and they're on owner salary and the owner salary is creating the loss, you can't take that. So when it comes to equipment, this is what I've always said for years.

When you make investments in your practice, do so for the operational and clinical needs of the practice. If you don't need it for one of those two reasons, stop. Don't buy anything. So the timing then, so let's say, they say, you know what, we really want to buy the milling machine. Like we're really excited about it, it's something we're going to do. And it's year end and they say, well, so the question comes up, should I do it now or later?

Kiera Dent (31:53.55)

Right. Yes.

Morgan (32:11.802)

Hi, you know, we can look, okay. What, what is your liability? If they just bought a practice that year, you know, I might say, look, if you need it now to practice how you want and to make more money, then do it now. We'll figure the taxes out. if it's on the wish list and like, you know, the horizon, we're going to do this. And we're definitely doing at least six to eight months. Like we want this in here and they just bought a practice. I, you know, I would say, let's think about holding off till next year.

Kiera Dent (32:24.686)

for sure.

Kiera Dent (32:35.886)

Mm -hmm.

Kiera Dent (32:41.518)

Okay, and that was my thought too. Right.

Morgan (32:41.594)

because we got a lot of deductions this year. And this is why, Kiera, is that if a practice is growing, right? And that's, you know, you and I are in that same business. We want to help our doctors make more money and grow and be more successful. If you're more successful making more money, you will have a higher effective tax rate, like we just talked about. There's no two ways about it. So if you have a higher effective tax rate in a future year, your tax...

Kiera Dent (32:56.462)

course.

Kiera Dent (33:02.99)

Mm -hmm.

Morgan (33:09.754)

when you buy equipment, that tax benefit is also greater. So here's a quick example. You buy 100K piece of equipment and you have an effective tax rate combined federal and state of 25%. That's a $25 ,000 tax benefit. If we do it next year, buy the same $100 ,000 piece of equipment and you're making all this more money enjoying all the success and your combined effective tax rate is 30%, that's a $30 ,000 tax benefit.

Kiera Dent (33:12.494)

Correct.

Morgan (33:37.37)

So putting it off to the future year on a growing practice is not a bad thing. And so when you hear things like, well, you don't want to miss out on your Section 179, I'm just like, well, hold the phone here, right? Let's do what makes sense for the practice. You never miss out on anything ever when it comes to tax deductions. You get to deduct 100 % of every dollar you spend on your practice. It's just a matter of when. And next year is not a bad answer.

Kiera Dent (33:48.11)

Yeah.

Kiera Dent (34:01.87)

Okay.

Kiera Dent (34:06.51)

Awesome, no, that helps a lot. So I just want to ask as we wrap this up, Morgan, this has been so helpful. I don't want to chat bonus. I will always ask you a million questions because like I said, I feel like taxes monopoly rules teach me more. But let's talk just real quickly. I want to get a smidge dicey on politics with you.

With the election coming up this year, what do you think business owners and practice owners should be preparing for regardless of whomever? And I mean, maybe you can say if one gets elected Republican or Democrat, like what did it impact us tax wise or things that we should be preparing for for the next four years? Of course, I don't hold this as a crystal ball. Like I said, I kind of want to get a little dicey and juicy with you on this podcast. Like what would you say would be some wise things for us to be doing as business owners now, pending upon the political landscape moving forward?

Morgan (34:34.618)

Yeah.

Morgan (34:44.442)

Yeah.

Morgan (34:52.026)

And I don't, I can't say for sure. It is really difficult to change the tax code. I mean, it happens like once in a generation. So regardless to who wins, the chances of something drastic taking place like next year, I think are pretty slim, particularly if it's right.

Kiera Dent (35:11.79)

So you don't think that if one got elected over the other, because there's always talk about like high earners, which dentists obviously are that they're just going to get like hosed on taxes. And they'll increase that. Do you think that that could happen in any way?

Morgan (35:18.81)

Mm. Yeah.

So the big question right now is that the 2017 tax cuts and jobs, that is set to expire. And if that expires, the highest marginal rate is going to go back to 39 .6 from 37. The brackets are going to change. So is that going to happen? I don't know, regardless of who wins. Because I don't know.

Kiera Dent (35:30.222)

Mm -hmm.

Morgan (35:53.402)

I don't think it's going to be particularly popular for that to expire no matter who wins. Now, can we do anything about that as business owners? I don't think so because we have passed through entities, all of us. There's no hiding the money. There's no... This is a question I get all the time. Like, well, I'm not going to take the money out of my business because I don't want to pay...

Kiera Dent (35:59.63)

Sure.

Kiera Dent (36:10.67)

Mm -hmm.

Morgan (36:22.874)

pay tax on it. And I'm like, there's an hour. And I get it the other way, too. I'm just gonna pull it all out of the business. So you can't really like do anything different. So when I think about this, yeah, I definitely don't want to see those.

Kiera Dent (36:24.014)

We still do. It's a profit.

Kiera Dent (36:29.902)

No. What about like real estate? Like what it makes sense to do real estate or like I've also heard that the capital gains tax if one gets elected over the others could impact if people are selling for DSOs. Like any of those things with capital gains or real estate. I also heard I think that depreciation for the syndication. I don't know if I'm saying the right words in real estate. It's like going down each year of how much it is. I'm not saying to go get into that, but are those any of those types of things, things we should look at?

Morgan (36:59.802)

You know, the capital gains one is one that has kind of my biggest attention. Just because they're talking about some high, some pretty substantial changes. But again, if things revert back to the 2017, you know, that doesn't put capital gains up at like 40 % or whatever they're talking about. I mean, that's a new rule that would go in place. And I just, I can't see how that possibly get passed because you're discouraging.

Kiera Dent (37:04.142)

Mm -hmm.

Kiera Dent (37:18.958)

Right.

Morgan (37:27.226)

entrepreneurs and job creators, you know, from investing, particularly in real estate, you know, if you look around, like all the apartment complexes and everything that cities need to house people, well, those aren't government projects, those aren't investors. And if you take away the reward, who's going to take the risk? You know, so I think the likelihood of capital gains blowing up like that is, I don't know, I have a hard time seeing that. But like, what are we doing? What am I doing? I'm doing the same things I would do anyway.

Kiera Dent (37:43.598)

Yeah.

Kiera Dent (37:50.51)

Okay.

Morgan (37:57.37)

Collect the most money you can. Watch your overhead. Don't have collection problems. And one question I get all the time, Kiera, someone's like, and you know what? I think I'm gonna sell. Like I've been at it for a lot of years, I'm gonna sell. How do I prepare to lower the tax bill? You heard that one? The sad answer, there's really nothing you can do, right? And if someone's wanting to position their practice to sell,

Kiera Dent (38:15.534)

Great question.

Morgan (38:26.202)

You do all the same things you'd want to do anyways. You want the highest annual collections with the highest profit margin, because that's going to yield the highest valuation. And both of those are things you'd want to do for yourself anyway. Collect a lot of money with the highest profit margin possible, make the most money, that's how you prep it. But on the tax, you're taxed on the taxable gain realized from the practice. And the gain is calculated as the difference between what you got paid,

Kiera Dent (38:39.63)

Mm -hmm. Sure.

Morgan (38:53.914)

and what your tax basis is, and your tax basis is what you paid in the first place, less what you've taken into appreciation. It's set in stone. You can't go back.

Kiera Dent (39:02.254)

But if you got paid that out, could you get that paid out over like a five year term and reduce it that way so you're not getting it all up front or does that really make a difference?

Morgan (39:09.466)

You could, but that requires an owner carry. So does, you know, to try and trim, you know, well, and to try and spread that out and maybe I'm in a lower effective rate in future years, you also then for that to work, you get paid out over time, which means you're, you're doing some type of owner financing. So do you, does the, does a seller want to take that risk? Maybe they really like this new doctor, but if the new doctor comes in and turns out that they run that practice in the ground.

Kiera Dent (39:28.366)

Sure.

Morgan (39:39.45)

and declare bankruptcy, do you want to just be out of that money? Or do you want that money like all up front? So there's, what that's called, it's treated like an installment sale is when you get, you can sort of that tax bill out, but that requires the owner carry, which increases risk.

Kiera Dent (39:43.926)

right. Is there any?

Kiera Dent (39:57.646)

Is there anything that I sound so naive, so I hope everybody gets a good laugh out of this, including yourself. Is there any type of 1031 exchange like they have in real estate for businesses? Like you can't put that money anywhere else to reduce the taxes.

Morgan (40:11.29)

Now, so that was killed in 2017. If things revert, you know, there could be changes there. But yeah, as it is, the 1031 exchange, and that's always in the gun sites of Congress, right? And I've heard talk about it, like even the real estate one going away, because it's not, you got to, the 1031 is not a tax -free exchange, it's a tax -differed exchange. We're just putting this off.

Kiera Dent (40:26.03)

Mm -hmm.

Kiera Dent (40:39.854)

But it's because we were putting it off in the hopes that we'd have a lesser income that year, right? So we'd pay less in taxes when we defer and start selling those business, those real estate off, right?

Morgan (40:40.41)

It only exists for real.

Morgan (40:50.842)

Now for real estate, I mean, generally real estate appreciates. Right. So, you know, in terms of real estate, 1031, I think you are just putting it off. I don't think it's going to be less.

Kiera Dent (40:55.406)

That's fair.

Kiera Dent (41:01.166)

What have you moved to Puerto Rico though when you sell it? I'm just asking questions over here.

Morgan (41:05.658)

Bye.

Maybe you moved to Puerto Rico. So regarding that, it's hard enough to have the so -called crystal ball in just looking at, OK, it is June 6. I can hardly believe right now. It's hard enough just to see, OK, for the next six months, what's your profit going to be? That's hard enough to try and say. Trying to look into future tax years on how the laws are going to change, I just.

Kiera Dent (41:11.022)

You

Kiera Dent (41:26.958)

I know, right?

Morgan (41:39.674)

and then make decisions now based on what we think then. I don't know, maybe that gets a little out of my lane, you know, maybe gets into the financial planning lane. But, you know, regarding tax, you know, what comes first and foremost is run a successful business. Be an amazing clinician, be an amazing business leader, inspire people. You know, I get asked all the time, like, what's the hot geographic area? What specialty should I go in so I can make the best decisions?

Kiera Dent (41:56.814)

Agreed.

Morgan (42:07.706)

money and I say look geography has nothing to do, geography is very limited impact. Some of our highest earning like most successful clients are in San Francisco, one of the most expensive cities on the planet. It's the doctor, what type of clinician, what type of business leader and those doctors that have the whole package and run an amazing business and the patients love them, the staff love them and they refer out minimal because they have an expansive skill set. Those are the doctors that make

the most money. So like my focus is always on, okay, how do we help doctors get there? How do we help them enjoy the most financial rewards? We will execute a number of tax strategies to trim that tax bill, keep them informed along the way and enjoy that type of success, financial success. But I'm not really looking ahead trying to look at what's going to happen now.

Kiera Dent (42:40.846)

Yeah.

Morgan (43:03.994)

We'll certainly pay attention depending on what happens next year and any changes in likelihood. And trust me, there's going to be plenty of professional commentary on predictions on what may happen. But there's nothing I'm not going to advise anybody to do anything differently now other than just run the best dental practice they can and comply with the tax treatment plan, which is tax planning, and make those estimated payments.

Kiera Dent (43:31.758)

I love it.

Morgan (43:32.346)

and do everything we recommend to trim that text.

Kiera Dent (43:36.622)

Yeah, brilliant Morgan and I appreciate that and I just want it again. I always love asking people's opinions on it because I think everybody is wondering what to do, but I agree with you and I think some of the best advice is don't try and lower your tax bill like having a higher tax. I mean and that means like don't make less than you should run a very successful practice by the things that are going to move your practice forward. Do it because it's going to grow your business. You and I are very, very complimentary in that regard and so I just love you chatting about him right now. I'd say we're halfway through the year.

So people start looking at your tax bill, start looking at what you're projected out there, start making sure you have these things in place. Talk to your financial CPA. That's why I wanted Morgan on right now is because I want you guys preparing for end of year. So you don't have these hard December's with bonuses and different ways that you do things, have a plan in place. So Morgan, if people are like, that's it, I'm done. I need a new CPA. I love Morgan. I love that he can help me set this up, whether it's associates, whether it's startup, like Morgan is truly brilliant with dental CPA work.

How do people connect with you? What's the best way to get in contact?

Morgan (44:36.666)

So they can jump on our website, HDAGroupDental .com. That shows our core value proposition, our three main services. There are links all over that place to set an appointment. Just realize we don't have salespeople. Initial consultation is me and my business partner, Courtney. We do all of those personally. You're talking with an owner up front. We get to know you, understand your situation, and tell you about what we do. So you can set an appointment that way. Or if you just want to email me, mhamon, M-H -A -M-O -N, @

HDAGroupDental .com. I will respond to you personally and we'll set up a time to chat and see if it'd be a good fit.

Kiera Dent (45:12.974)

amazing. Like I said, I love you guys. I appreciate you answering all the questions. Reach out. And I really do believe getting good numbers is probably the best thing I ever did to make my business successful and having a good CPA that I could count on that got me numbers timely, that knew what I was doing in my industry. So helpful. So Morgan, thanks for being on the podcast today. Always enjoy our time.

Morgan (45:32.922)

Me too, Kiera. I enjoyed it. I appreciate you having me.

Kiera Dent (45:35.918)

Always. And for all of you listening, thanks for listening and I'll catch you next time on the Dental A Team Podcast.