Episode 704: What Should You Expect from Your CPA

 CPA Morgan Hamon returns to the Dental A-Team podcast. In this episode, he and Kiera dive deep on smart steps for dental practices to take financially, including…

• What businesses should expect from a CPA

• How to prepare for tax day

• Tax strategies for dentists

• What practices should be doing now, in the middle of the year

• And more

About Morgan: Morgan is a graduate of the University of Arizona school of business. Following graduation, he was commissioned as an officer in the United States Navy and served for over ten years as a Naval Aviator flying carrier-based F/A-18 Hornets. During that time, he deployed to the Persian Gulf and flew combat missions over Iraq in support of Operation Southern Watch. He also served as a flight instructor and landing signal officer for newly winged Naval Aviators transitioning to the Hornet, training pilots in air-to-air combat and landing on aircraft carriers.

After leaving the Navy, Morgan obtained a master’s degree in accounting with a concentration in taxation from Metropolitan State University of Denver. He is a Certified Public Accountant (CPA) and is the co-founder and President of HDA Accounting Group leading a large staff of professional accountants delivering a variety of financial accounting and tax services. Morgan regularly conducts practice profitability advising for dentists, helping them analyze their financial data and identifying strategies for profit improvement.

Episode resources:

Learn more about HDA Accounting Group

Connect with Morgan: [email protected] 

Listen to episode 430, Your Practice’s Most Important Numbers to Know

Reach out to Kiera: [email protected] 

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Transcript:

[music]

0:00:05.8 Kiera Dent: Hey everyone, welcome to the Dental A Team Podcast. I'm your host, Kiera Dent. And I had this crazy idea that maybe I could combine a doctor and a team member's perspective, because let's face it, dentistry can be a challenging profession with those two perspectives.

0:00:19.0 KD: I've been a dental assistant, treatment coordinator, scheduler, filler, office manager, regional manager, practice owner. And I have a team of traveling consultants where we have traveled to over 165 different offices coaching teams.

0:00:31.9 KD: Yup. We don't just understand you, we are you. Our mission is to positively impact the world of dental. And I believe that this podcast is the greatest way I can help elevate teams, grow VIP experiences, reduce stress, and create A Teams. Welcome to the Dental A Team Podcast.

[music]

0:00:51.3 KD: Hello Dental A Team listeners, this is Kiera and you guys, I have one of my favorite people in this entire world and he's a CPA. I used to work for a CPA firm, I don't know, Morgan, if you know this, I'm gonna like intro you without intro-ing you. Don't worry. I'm getting there.

0:01:04.0 KD: And I almost got fired from the CPA firm because I talk too much. And so the fact that I love you so much as a CPA speaks volumes. Morgan Hamon, owner and founder of HDA Accounting, one of my top favourite dental accounting firms.

0:01:21.1 KD: I tried so hard to get Morgan to work for me and be my CPA and he said, "No, you're not a dental practice." [chuckle] And so I still love him 'cause I refer everybody to you. Morgan, welcome to the show. How are you today?

0:01:31.1 Morgan Hamon: Thank you very much. I'm doing well. Appreciate you having me on.

0:01:34.3 KD: Of course. So for those people who don't know HDA Accounting, you need to know it. Morgan, just kind tell people about HDA Accounting. What are you guys about? Who is Morgan Hamon if they haven't heard from you so far?

0:01:46.5 MH: So HDA Accounting Group, we are very specific CPA firm. We only work with private dental practices, period. And to your point...

0:01:55.4 KD: AKA, not dental A Team.

[laughter]

0:01:57.6 MH: We've been very disciplined in staying within our niche. You know, what we're good at. No other type of doctor, no other type of industry. And even within that niche, it's private dental, no DSL.

0:02:07.4 KD: Which I love.

0:02:08.9 MH: No corporate. So it's all...

0:02:10.4 KD: I actually think, Morgan, that's why you guys are so good with your reporting. And so I give you quote like "friend flack" over here, know that it's all said with pure love, because I love that you are that disciplined.

0:02:21.5 KD: I mean, normally when I have someone that I know in the industry, I usually can convince them to work with me. I'm very good at convincing people.

[chuckle]

0:02:30.2 KD: But I loved... I actually have more respect for the fact that you said, "Kiera, this is our niche, this is what we're good at. And I would be doing you a disservice." So, okay, continue on. You only work with private dental practices.

0:02:41.7 MH: Private dental. And our mission is to do three things. Take care of the monthly practice accounting, keep all the data up-to-date, step one. Step two, help our clients maximise profitability during the year. And I think we do that two ways. One, we give people that report we're talking about, that practice profitability analysis, something our doctors can actually read. Targeted, full colour, dashboard style report, all geared toward profit and profit improvement.

0:03:12.9 MH: And then we're also available to talk about that. You know, we are not consultants, but we do know a lot about dental practices. If the profit margin is low for that practice, I guarantee you we'll know why. And we can help our clients spend the limited time they have to be CEO of their business, and spend that time on what will hopefully make a difference, put more money in their pocket.

0:03:33.2 MH: And then the third key service is, tax planning and doing the tax returns and helping them during the year avoid as much tax as possible. But also we work really hard to avoid surprises as much as we can by just looking at the taxes, doing some forecasts, and just being very upfront about it and making sure doctors are prepared during the year.

0:03:56.5 MH: So that when we get to filing the taxes, they're substantially paid in and there's, you know, they can feel confident that they did not leave any money on the table with the government, but it's also not time to get out the checkbook for any big checks. So that, that's us. That's what we do.

0:04:12.3 KD: I love it. And before show, Morgan, you said, "My goal and our goal as HDA is to help people make money and keep money," which is always a positive. I love your guys' reports. I can always tell when a practice works with HDA Accounting because they know their numbers really well.

0:04:30.5 KD: You guys have beautiful reports every single month that you send out that shows are we doing well? Where can we improve? And that's one the reason I love you guys 'cause you work with hundreds of dentists across the nation. And as someone who didn't know how to read a P&L before I started a business, like I truly had no idea.

0:04:48.6 KD: I owned part of a practice, I didn't really know what profitability was. And by not knowing that, I left a partnership with more money on the table than I should have.

0:04:57.8 MH: Nice.

0:04:58.0 KD: I take that as my education in business ownership. But no one should need to be leaving money on the table as business owners. And so I think you guys do an excellent job educating your clients of what they should be looking at, what they should... What are the industry standard numbers compared to other dental offices.

0:05:15.1 KD: So let's talk about, I always like to educate people for like what should be expectations of a CPA, Morgan? Because I don't think people even know what to do. And I wanna remind people, and I'll say this lovingly, your CPA works for you and they should get you the information you need to know.

0:05:32.3 KD: So what should be an expectation of clients of what a CPA should even be delivering on a monthly, quarterly, annual basis?

0:05:38.1 MH: I think it really depends on what they're looking for. So if you... In most CPA firms, most accounting firms are very tax oriented. So they mainly just wannna do a tax return and maybe some tax planning toward year end. But they mainly wanna do the tax returns.

0:06:00.1 MH: And I think most firms out there when they look at the bookkeeping, they don't necessarily, for lack of a better way to put it, they don't really want to get their hands dirty all year with the bookkeeping.

0:06:12.4 MH: And they can certainly do a good job on the tax compliance, but they're not with the client all year. And so that's gonna be most accounting firms out there. And if that's what someone's looking for, you got plenty to choose from.

0:06:24.1 KD: Sure.

0:06:25.1 MH: Then on another option, and this is a lot of our main competitors, there's a trend in the CPA world toward wealth management.

0:06:35.0 KD: Yeah, tell me more about this?

0:06:37.3 MH: Where the CPAs... The CPAs will go get licensed so that they can sell securities and manage your money. And so in my opinion, I think that's a conflict of interest. I think you have competing objectives when it comes to business and tax planning and financial planning. And I also believe strongly that you cannot be all things to all people.

0:06:57.8 KD: I agree.

0:07:00.8 MH: But that there's a lot of firms out there, a lot of dental firms where that is their value proposition is, "We'll manage your money." And so if you don't have assets under management, it's not going to be a good fit for those firms.

0:07:17.9 MH: I personally just don't agree with that. It's not our... That's not how we do it. We are serious accountants. We stick with the accounting and the tax, and then we're very happy to be team players and collaborate and coordinate with financial planners who have their, that separate skill set.

0:07:34.9 MH: And I guess that leads to us, right? What do we do if somebody is looking for dental specific, and let's talk about that for a minute, what does that even mean? You hear like, "What's a dental-specific CPA?"

0:07:45.2 KD: Aren't all CPAs the same?

0:07:46.6 MH: Right. It doesn't...

0:07:46.8 KD: You guys all just do numbers.

0:07:47.9 MH: No.

0:07:48.0 KD: You send me these reports, you tell me I owe you tax money.

0:07:53.7 MH: What are dental-specific CPA? When I think of that, what does that mean? It means that during the year we can help our clients make more money. We can help them maximise profit and we can also give them feedback just so they can have some comfort, some peace of mind, knowing that they have an appropriate financial reward for owning a business. And let's...

0:08:19.0 MH: You own a business, I own a business, our clients own businesses. Owning businesses is, it's challenging. There's risk. If you look at most of our clients, they signed personally, a personal guarantee on a five or $600,000 note. They've got all these employees, six, eight, 10 employees usually for a medium sized dental practice. And it's stressful. They're a clinician, they didn't go to business school.

0:08:45.3 MH: And so when we can give them just some very targeted feedback on, okay, these are your results and the first thing to know is are the results acceptable? That's profit margin. Dental-specific, we're going to know what that is. You go to CPA with the shingle out on the street, the local CPA, they don't know. They don't know what the profit margin should be for a $1.4 million size like specialty office.

0:09:15.2 KD: Okay Morgan, we're going to get like real nitty gritty. What should these be? Can you give some ranges? I mean, this is what you guys do.

0:09:20.6 MH: Yeah, absolutely.

0:09:20.7 KD: This is why I love your reports.

0:09:23.1 MH: So let's talk, let's just... If you look at the, like the bell curve of our clients, our average client size is a $1.3 million single doctor owner operator practice.

0:09:35.5 KD: Okay. And how many ops are average on 1.3 single doctor? Are we five ops? Are we six ops?

0:09:43.4 MH: It's like six, six, seven. We track revenue per operatory. So I know the dollar amounts.

0:09:50.0 KD: Let's talk about that.

0:09:52.3 MH: We don't necessarily relate that with size. But I can share with you. This has been a very steady metric for a long time. More...

0:09:56.7 KD: Yeah. I want to dive into all the metrics that you're willing to share. Obviously I want to make this...

0:10:02.4 MH: On average. Yeah?

0:10:02.6 KD: Yeah. Tell me.

0:10:03.4 MH: 23,000 per month, per op.

0:10:05.4 KD: Okay. And is that doctor or hygiene? Doesn't matter. Or is that just combined together?

0:10:10.7 MH: That's all the above. That's all of them. All the collections.

0:10:14.2 KD: Okay. So 23,000 per op. So people should then be able to determine if I'm in a five op practice, 23,000 times five. Morgan, you do math better than I do. I think that's 85.

0:10:25.6 MH: 23 times five. That that's going to be close to 120.

0:10:28.6 KD: I meant 113.

0:10:29.9 KD: Yeah. Somewhere near.

[laughter]

0:10:32.6 KD: Can we cut that guys? Cut this part.

[laughter]

0:10:34.7 MH: Yeah, 120 a month, about a 1.4.

0:10:38.0 KD: Okay. 115. I just did the math. Alright. Don't mind the fact that I first said 80. I forgot to carry my two. Okay.

0:10:43.6 MH: All good.

0:10:46.0 KD: But with that, okay. So 115 on a five op 23,000, of course you can grow more, but at least 23,000 per operatory should be a good base.

0:10:56.1 MH: Right. And that profit margin, minimum, should be 35 to 40%.

0:11:03.0 KD: Okay. Can you help me go through profit? Because Morgan, there is a heavy debate here. Does profit include or not include paying a doctor. And this, I have my own feelings, but I'm not a CPA. So what exactly does this mean?

0:11:15.6 MH: Well, I do have some very strong feelings on this. I'll share those. [chuckle]

0:11:18.7 KD: Excellent.

0:11:19.4 MH: It does not include one single dollar to the owner.

0:11:23.6 KD: Okay.

0:11:23.8 MH: Profit margin is before the owner touches anything. So you pay all the bills to keep the doors open. Alright, and so 35 to 40% of every dollar collected should be available to the owner as compensation.

0:11:42.8 MH: And you have to do that because then we can compare apples to apples on what a practice is doing. 'Cause when the money comes home to the owner, the mechanics of that is really a tax avoidance strategy, right?

0:11:58.2 MH: So a practice like this, if it's a single owner, it should be taxed as an S corp. The owner should be on a reasonable W-2 salary, which is gonna be frankly, the lowest salary we feel we can substantiate for a doctor. They're going to pay their payroll taxes on that salary, but the balance of the profit comes home via profit distribution, not subject to payroll taxes.

0:12:19.2 MH: And that in this example size practice we're talking about, it's going to put 11, 12,000 bucks in the doctor's pocket. So if you...

0:12:25.1 KD: So can I ask, I have some clarifying questions on that. Because, so let's say a reasonable salary, let's do 100,000 right? We can justify a 100,000 for a dentist is what they're going to make. And that's, they're gonna be paying payroll tax on that and then the rest would be distributions not subject to payroll tax.

0:12:44.7 KD: But Morgan, I've heard from some other CPAs, and this is, this is what I found actually, and I'm just gonna put this out there. Find a CPA that aligns with you, because all CPAs will do it differently. And I heard everything's expense-able until you get audited. So I like, I like to stay away from the audit world.

0:13:00.2 MH: Right.

0:13:02.1 KD: But Morgan, on that, is there any strategy ever to maybe increase your pay? So let's say you pay 250, so you're paying more in taxes through payroll, knowing that whatever the profitability is, like what's the benefit or risk of doing that model?

0:13:16.0 MH: So I almost think we have, we kind of have two topics going here. First, profit margin, in my opinion, should never include money to the owner. Because whatever somebody's personal choice is on what their reasonable salary is, okay, if we look at profit margin after that, that's not really indicating the actual operational results of that practice. Right?

0:13:37.6 MH: We saw this many patients, we paid the hygienic, paid the staff, so this is what's left over. That's what we really need to look at. Once we know, okay the business produced this level of money for the owner, which should be 35 to 40% of what was collected, then we can go on and to say, "Okay, now how are we gonna get that home?"

0:13:57.0 MH: The reasonable salary is very vague in the internal revenue code. It literally says "reasonable".

[laughter]

0:14:06.3 MH: So we have to look at prior tax court cases, what the IRS like how have they, how have they handled this. For a high earner and how we define higher earner, we're making five, 600,000 a year. Pretty typical. We see that all the time. We probably set that salary closer to about 150. That's closer to the social security limit.

0:14:31.3 MH: We know that if a higher earner has paid in their share of social security taxes, the IRS stops caring, right? And there's still substantial savings on that Medicare tax and the surtax for those higher earners.

0:14:44.6 KD: So we actually have a formula. We have pretty detailed analysis that, that we feel if our salary were ever questioned, we would be well prepared to substantiate that with any revenue agent. So we do a couple different measurements. We look at, you know, what would their, what would their pay be if they were an associate? So we'll actually do a proforma production to run a salary that way.

0:15:13.7 MH: We will then look at what were the prior year distributions and salary. Right? 'Cause that's, that's the risk factor. If the IRS audited a practice and said, "Look, we don't think this salary is reasonable." The IRS does not have the power to declare a salary. They cannot go back and say, "Hey, for 2022 your salary should have been this amount."

0:15:38.3 KD: Okay.

0:15:39.4 MH: What they do have the power to do is to re-class your distributions to W-2.

0:15:47.5 KD: I see.

0:15:48.7 MH: So if you were super greedy and you put yourself on a minimum wage salary and made 600 grand and took it all home in distributions, the IRS could theoretically say all 600 is W-2. If they do that, get your cheque book. And hopefully you save some money 'cause it's gonna be really expensive. So we'll look at that.

0:16:09.5 MH: And then the third measurement we do, we call it the safe harbour. Okay, what's social security? . And then we'll pick the lower of whichever one came up. And we feel we could substantiate that. So that's how we go about doing that.

0:16:20.4 MH: But that is, that's a tax avoidance strategy that we want to be able to defend, but it has nothing to do with the economic performance of the practice, which is why we then don't subtract whatever salary that is on the P&L and look at profit after owner salary, because that doesn't really give us a measure of the economic performance of the practice.

0:16:43.2 KD: Okay. That helps me understand that more, because I think the reason I ask this, and I would actually love you to dive into this as a CPA. I mean, guys, this is my podcast. I love Morgan, I love CPAs. I love, I love being smarter on taking more money home than paying it just 'cause I'm not educated.

0:17:00.5 KD: So a common thing I see, Morgan, is if doctors don't put their salary in, two things I see. One, they feel that they can just run the profit down lower and when there's no money left over, they're the first person to take a hit and they just say, "I'm not gonna take a cheque." So then they don't pay themselves for it 'cause they're not running it on a profit margin.

0:17:22.1 KD: And then the second thing is, if they're not putting a salary in or if they want to put a salary in, how can they work themselves out of the business.

0:17:29.2 KD: So sometimes, and I'm not sure if this is even right, I'm asking you 'cause this is what I did. I wanted to be a mom. That didn't work out for us, but I was like, "Well if I'm ever gonna replace myself, I need to pay myself a salary on the top. I need to pay myself as a consultant or as an associate."

0:17:44.8 KD: That way those things are above the line 'cause I'm gonna literally have to pay a CEO to come in, I'm gonna have to pay an associate consultant to come in, and I wanna see what the profit margin is at the bottom of what my take home pay would be to work myself out of the business.

0:17:57.4 KD: So I'm curious, how do you, how do you one, make sure the dentists do pay themselves? 'Cause I really, I feel if you're not paying yourself as an owner, go be an associate. That's a better gig for you. How do you do that when it's below the profit line?

0:18:10.7 KD: And also, 'cause I, like that profit line also pays taxes. And also I've heard from some CPAs, you pay debt services out of that, which then leaves very little for that dentist if they're only doing a smaller salary at the top. It's hard to pay themselves. How do you, how do you work through that?

0:18:27.8 MH: So keep in mind what we're talking about is like an S-corp. If it's a smaller practice or startup, they're gonna be taxed as sole proprietor, they only take draws. So they're, they're never gonna have salary.

0:18:38.9 KD: Sure.

0:18:39.9 MH: So here's how I recommend structuring the distributions so that you do get paid as the owner and then we could talk about how, how we could work ourselves out.

0:18:50.1 KD: Perfect.

0:18:51.7 MH: And I have a pretty... I guess have some opinions on how owners get paid. Like in my opinion, owners get paid last. If we create a successful company, have a compelling value proposition, run a tight ship and it's efficient, there will be profit left over. And that's what we are. That's what we get.

0:19:13.1 MH: But as business owners, we're entitled to nothing. We have to make it happen. And then we get the accumulated leftovers, if you will, in terms of profit.

0:19:21.4 MH: So what I tell our doctors is, yes, you do need to pay yourself, take your distributions. All of our clients have pass-through entities. Everybody's heard of that, alright? And that's gonna be a sole proprietor, an S-corp or a partnership. But what that means is the profit that the practice realises, passes through to the personal tax return and you pay your tax there.

0:19:49.4 MH: What can be a shock for new business owners is look, you pay tax on the profit the practice earns regardless whether you take it home or not.

0:19:58.4 KD: Correct. It's always a sad day, Morgan.

0:20:01.0 MH: You may as well take it home. [chuckle]

0:20:02.3 KD: I learned that. I was like, "I'm sorry, how much do I owe?" [chuckle]

0:20:06.4 MH: Right. And I've had this question before and I'll get it, at the end of every year I always get it from some newer business owners. They say, "Morgan, year end's coming up, I'm just gonna leave all the money in the business 'cause so I don't have to pay taxes on it." Or I'll hear it the other way, "Should I take all the money out of the business so I don't have to pay tax?" And the answer, both are incorrect.

[chuckle]

0:20:26.9 MH: The tax is driven off just math, what did you collect, less expenses, profit. That's what you pay tax on. Alright, so let's take some distributions. That's why we own businesses. Let's, this is the fun stuff. So let's structure distributions.

0:20:43.7 MH: I think that, so every business needs to have a reasonable no-lower-than cash reserve. Or we call it working capital. However you want to think about it. We can define that very easily, especially on our reports. Shameless plug for our reports here.

0:21:00.8 KD: They're beautiful reports, honestly. We should show them on our next podcast. Unless you wanna share a screen. They're beautiful reports.

0:21:06.7 MH: We calculate break even. Now the break even is all... You cannot pull that number off of a P&L. It's the total operating expenses, and you said this, Kiera, you have to add in the monthly debt service. What does it cost to service that loan, loan principal. That number is hidden over on the balance sheet. You have a big note and every month you write that check.

0:21:28.7 MH: A portion is interest, that's part of the P&L, but a bigger portion most of the time is loan principal and that big note on the balance sheet just gets a little smaller. But that money's gone out of the bank account. So you have to look at the average monthly operating expenses plus the monthly debt service equals your breakeven.

0:21:49.3 MH: Prior to COVID, most practices kept about one to one and a half times breakeven as a cash reserve. Nowadays, and it's been this way since 2020, that's two times. We calculate that on our report. Everyone can see what our client average is by two times breakeven.

0:22:09.5 MH: So if a practice has a $40,000 breakeven point, they keep about 80k in the bank on average. Ultimately it's whatever the owner's comfortable with. There's no wrong answer. Although the more money you have, the less stress, but you don't want too much money 'cause we want to be paying ourselves.

0:22:31.4 MH: Let's say that the owner thinks about it and they say, "80k is good. I can sleep at night, I can pay my bills comfortably, I don't have to juggle cash." If rent is up the same week as the shine bill, same week as payroll, who cares? You got money to just pay your bills.

0:22:47.8 MH: So at the end of the month, you can distribute cash that your practice actually has. At the end of the month, you log into the bank, if there's 100K in the operating account and your desired cash reserve is 80, cut yourself a check for 20, take a 20K distribution.

0:23:07.5 KD: Do you recommend, Morgan, to keep that, I call it like my nest egg, but like two-month security bucket in your operating? Or do you recommend putting that in a separate account so we don't accidentally touch it?

0:23:20.8 MH: Totally up to the doctor. When I talk about cash reserve like on a report, we aggregate all the bank accounts. Somebody if has an operating account, a rainy day account, money market account 'cause they're trying... We aggregate all those. So we're talking...

0:23:35.2 KD: Okay. And if you're Kiera Dent's financial advisor, AKA Ryan Isaac, and he sees that I have about 20, he's like, "Don't you need to consolidate?" And I'm like, "Oh no, these are all my little buckets here, Ryan. They're totally fine." [chuckle]

0:23:46.7 MH: Yeah. So we look at all the buckets and take a distribution.

0:23:52.6 KD: I see.

0:23:55.6 MH: And I recommend you do that regularly. You could do it monthly. Most of our partnerships, our firm included, we do it quarterly, but you want to take the regular distributions home. And you should do it based off math and it's any cash that's accumulated above and beyond whatever your desired operating cash reserve is.

0:24:15.4 KD: How do you operate that? I'm just gonna get into taxes because I feel like I've been burned on taxes a thousand times over. I'm terrified of them. I have truthfully three savings accounts for taxes, here's the main one what I'm gonna owe, here's the quarterly one. And then here's in case my CPA didn't calculate this right 'cause they always call me in October of like, "Oh congratulations, you made more money than we think you owe this much," and I'm like, "I hate this call."

[chuckle]

0:24:42.5 KD: So on that, because of profit, we owe X amount of tax. So let's say, like you said, there's 100,00 in the bank account, 80,000 is our safeguard. There is... Where do we pay taxes? How do you recommend preparing for that? 'Cause I get scared of this, Morgan.

0:24:57.4 MH: This is, I'll tell you how we do it. First off, I recommend that when you take a distribution, you want to take a portion of that and put it in one of your rainy day fund accounts or you could just leave it behind or just put it somewhere.

0:25:16.8 MH: The percentage that you want to leave behind, it's really dependent on what we'll call your effective tax rate. So there's two types of tax. There's marginal and effective. So marginal is gonna be your highest tax bracket. So whatever, you know, you look at your income, if you're in the 33% bracket, that's your top bracket, that's 33% is marginal.

0:25:36.7 MH: Now, when you get to the end of the year and you pay your tax and you just look up, "Okay, total income and total tax," you're gonna have an effective tax rate, sometimes called a blended tax rate. It's like, okay, well what's the average of it all? And maybe it's a 25% effective tax rate.

0:25:53.4 MH: You can usually find that on, just go to your last tax return. Like the ones we prepare, there's a tax summary page and it'll tell you what your effective rates are.

0:26:02.2 MH: So if you, let's say you had a 22% effective federal and a 5% state, that's 27%. So if we want to be a little conservative, bump that up to 30 and if it's a $20,000 distribution, take 6K and stick it aside and save that for the rainy day so that when your CPA firm does quarterly tax planning, which we do, and we say, "You need to send in X amount of dollars to stay current on your tax liability this year," you tap those funds. You already have that money set aside.

0:26:46.7 MH: So it doesn't have to be stressful. You're prepared, you have the money. So anytime you take a... And I do this, I practice what I talk about. When I, and I... We take our distributions quarterly. The first thing I do, distribution times effective tax rate equals money I stick aside.

0:27:03.7 KD: What's your philosophy on quarterly tax versus end of year? I heard a rumour, Morgan, and you can tell me, if you don't pay your quarterly tax, it's about 1% like fine of whatever you owe. So if you owe 50,000, 1% of that is like a $500 fine. If I did my math right on that one. [chuckle]

0:27:26.4 MH: Yeah. So...

0:27:27.6 KD: Is that true? Like what's the benefit of doing quarterly versus not? Is it human beings by nature aren't good savers, so by doing it quarterly, it's not as big of a hit the end of the year?

0:27:40.4 KD: Because the reason I ask this, I do have a reason behind it, is hypothetical, let's say you owe 50,000 of tax at the end of the year. Right now, there are high yield savings accounts out there that are generating 3 to almost 4%. And that is bigger than the penalty at the end of the year if it is a 1%.

0:27:58.8 KD: So I'm curious, now I get that it's like, you know, are we really gonna play the game of saving to make money? But I'm just curious what your thoughts are around that, that's why I'm asking.

0:28:07.3 MH: So the IRS, they don't want paid at the end of the year. That's why they will do under deposit penalties plus interest. But it's in our industry that's tough, right? Because the IRS, they want paid along the way, but they want paid accurately along the way.

0:28:27.5 KD: Right.

0:28:27.8 MH: And here's the hardest part. I'll tell you Kiera, the most challenging thing we do is tax planning. By far. And it's not that the calculations or the math is difficult. What's difficult is knowing what's the profit.

0:28:44.4 MH: Today is June 8th. Doctor asked me, "Morgan, what's my 2023 tax bill gonna be?" Well, I don't know. What are you gonna collect this summer? What do you have going on this fall? Are you gonna pull the trigger on that new CEREC? You know? And maybe in November. I mean that really moves the needle on your tax returns.

0:29:03.8 MH: So we don't know what's gonna happen. So for us, that's the hardest part of tax planning.

0:29:09.9 KD: Morgan, I have a good analogy for you on that.

0:29:12.9 MH: Okay.

0:29:13.3 KD: I think our dental people will understand this and I've never thought of it until now. I think for a CPA, tax planning equates to a dental office estimating insurance amounts. Like not impossible, but very hard. We don't know what the insurance will or won't pay. We don't know what kind of profit we're gonna make in a business.

0:29:28.4 KD: So if it helps you understand like how hard it is to estimate correctly an insurance benefit on a procedure, take that times 20, and that's now I think for a CPA. I feel like that's actually my best analogy I've had of the day because I'm like, "Oh my gosh, that makes sense." It's hard to guess that.

0:29:46.8 MH: I'm stealing that on my...

0:29:48.0 KD: You should. [chuckle]

0:29:48.7 MH: Phone call. We're gonna be talking. [chuckle]

0:29:50.7 KD: Cause it, I think for me, I never understood. I'm like, how do you CPAs not know this? Don't you pay taxes every year? But you're right, it's dependent upon my spending for the business. It's dependent upon if we're gonna buy these big purchases at the end of the year. It's dependent upon how much we collect.

0:30:08.3 KD: And I remember last year my CPA said, "Hey Kiera, this is," you know, my non HDA CPA, because I still want them to work with me, but they're in their lane.

0:30:15.0 KD: But he said, "Kiera, I've got you tracking for what you did last year." And I'm like, "Hey, I'm in a pretty rapid growth rate." And he said, "Yeah, but that depends on what you're doing end of year."

0:30:24.7 KD: And the quarterlies, if I understand, Morgan, please correct me, I'm so glad you're here. I understand that quarterly estimates are based on last year's numbers. Is that correct?

0:30:34.4 MH: Well, the deposit requirements, the safe harbour deposits, the deposit requirements are based off last year's tax liability.

0:30:43.2 KD: And that was a fun surprise because when I made more and collected more and I was paying my quarterlies, I still owed money. And I'm like, "How does this work?" But it's due to the profit.

0:30:52.6 MH: Yeah. We tend to not base our tax planning on the safe harbour because a lot of our clients experience rapid growth. And I would like to say we're a part of that journey.

0:31:03.3 MH: So if we base the tax estimates off last year's safe harbour, they're gonna be under deposited. And that is not a phone call anybody wants to receive or make in March or April.

0:31:14.8 KD: No.

0:31:15.1 MH: So we tend to, we wanna make sure our clients are covered on safe harbour, but we really try to do the tax planning on what we're actually looking at. And so how we do it, we look at current profit trends that are happening now. We absolutely know what those are.

0:31:35.4 MH: We don't know what's happening this fall, we don't know if they're gonna close the office for two weeks, we don't know if they got major investments coming up. But we definitely know current profit trends. We have a very reasonable forecast formula. Of course I wrote it so I'm biased. I think it's good.

[chuckle]

0:31:54.8 MH: And so we will forecast profit, we'll combine that with the year to date hard data that we know. And guess what? That's what we know right now. Let's calculate what we're looking at and let's just be upfront with it. This is... Here's the information, we recommend you make a payment, you can if you want. We have some clients that just really don't want to get a refund so they don't make it. I personally believe, and I, this is again, I do what I say, I send mine in. I send my money.

0:32:29.8 MH: Now this topic comes up, Kiera, cause they have these ridiculous dates, like the second quarter date is June 15, but we're still...

0:32:35.5 KD: My favourite is the one that you pay in April right after you've already paid taxes. And I'm like, "I'm sorry, what?"

0:32:40.9 MH: Yeah, they have some ridiculous dates. Listen, it is just an estimate on income. We don't even know what the profit is. I always get... I always chuckle a little bit when people get like, "But it has to be June 15." I'm like, yes, but we're basing this off a number. We're not pulling a number out of a hat, but it's all... We don't know.

0:33:02.7 MH: The penalties and interest, the IRS has a formula where they go back and apportion the income during the year and come up with their penalties and interest. I say, look, make a reasonable estimate during the year. Who cares if it's right on 6/15 or not. I guarantee it, I pay my second quarter in July every year. I've never had a problem with it.

0:33:31.2 MH: So it's an estimate and I think it's better to keep up on it. It keeps the numbers smaller. And with the tax planning, the further you get during the year, the more accurate that planning becomes because we're using more hard data and less forecast.

0:33:48.1 MH: So when we get into, we're doing a Q4 let's say in November, and so all we're having to forecast is November and December. If that's even reasonably close to what's been going on, we're gonna be pretty darn close.

0:34:00.7 MH: I wanna ask on that, you guys are experts in tax strategy and paying less. How does this play into... Because a lot of times we'll do wild investments as business owners. There are, I don't know, there're like oh gosh, there's some wild ones, conservation easement one and that one creeps me out. But how do you, if you... What are some of the tax strategies that you guys recommend? Because I'm curious if those tax strategies do play into the quarterly.

0:34:32.4 KD: I agree with you, I think as human beings we should probably pay them more consistently. It's easier to fix your car when it breaks down in the moment rather than letting them all pile up and getting bigger bills. But what are your thoughts on the tax strategy playing into your quarterly profit as well?

0:34:46.1 MH: Oh yeah, we absolutely... There's a number of strategies that can be done that work well for doctors. And yeah, I'm very direct and forthright, particularly if I'm visiting with a newer practice owner that, look, when you own a small business, saving money on tax is hard work. It's a lot of teamwork. There's no shortcuts. There's no loopholes, there's no secrets out there.

0:35:11.1 MH: There's a number of strategies we have to execute. And we already talked about a big ticket one and that is utilising the tax classification to your advantage when appropriate for like an S-corp. That's five figure tax savings. But we... Every dentist should be taking the home office deduction.

0:35:28.1 MH: That's what unlocks the car and allows you to have some auto deduction. You can do staff meetings at home, take your board meeting. A qualified retirement plan is a great way to erase some taxable income off your tax return. Certainly any investments folks make in the practice are gonna lower that tax bill.

0:35:45.3 MH: So there's a number of strategies that have to be executed every year. A lot of these come into play later in the year. Some of that is just human nature, people put it off. [chuckle] And so we're gonna do all these reimbursements towards the end of the year and that's fine. But we do factor those in on the tax planning.

0:36:07.2 MH: Now keep in mind most of the strategies that work well for dental practices, it's not a deduction that's a line item on your tax return. You don't actually see it anywhere in your tax return. It's a tax strategy to lower taxable income. It converts expenses into business expenses, which lowers the profit. Less profit flows through to your tax return, that's how you pay less taxes. So you don't actually see this stuff on your tax return somewhere. We're just lowering taxable income.

0:36:36.7 KD: Okay. I was trying to wrap my mind around that. So it sounds like a home office, being in the correct S-corp. I remember when my CPA talked to me about that and I was like, "Well, it doesn't matter. And S and C, these are just cute letters." [chuckle]

0:36:48.9 MH: Not a C. Not a C. That's malpractice.

[laughter]

0:36:54.1 KD: I learned a lot of, I'm like, "Okay, I don't even know what these letters are." What other things can dentists do? Let's say new business owners. Because I learned, like the home office, I had no clue that buying a certain weight vehicle actually could benefit you sooner than later. I didn't know about that. I just thought, "Buy a car," and then they're like, "No."

0:37:12.3 KD: What other things? I'm not gonna go down through all the wild ones. Morgan, you stay where you wanna stay on these tax strategies. Anything else that they can take? We're in June. This is a perfect time to be looking end of year. What should we be looking at?

0:37:24.9 MH: What everybody should be doing right now, plan your board meeting. That is such easy money. You have an entity, you need a board meeting. Don't do that at home. It's a domestic long weekend kind of trip. Figure out where you want to go. Plan ahead, pay for it through the practice. Go have your board meeting. Turn a trip you'd otherwise want to take and enjoy into a tax deduction.

0:37:46.4 MH: And that's an addition to any CE travel or conferences or anything you wanna do. That's easy money. Summer's here, plan your board meeting. I need to do the same thing.

0:37:56.6 KD: I was gonna say, I'll make a note. Got it. Now we can do that. Good to know.

0:38:00.4 MH: Now let's talk about some of these other... Like you mentioned conservation easements, R&D is another one. Those are super aggressive. If you choose to go that route, your CPA is not gonna be doing those for you. We do not do those. You have to go invest in a company that's doing conservation easements or doing R&D. They will take your investment and then give you a K-1 with your share of losses typically that we then incorporate into your tax return.

0:38:32.8 MH: Both are vis, this high risk. And the folks you talk to, if somebody wants to go down that route, I've got a call on Tuesday with a client that's really wanting to do R&D, but that there's two sources of risk with that. There's audit risk and there's legislative risk.

0:38:51.8 MH: Audit risk is massive. The IRS knows these are abused, know these are abused. They're super high target for the IRS 'cause IRS thinks there's a big payday, and so they are under extraordinary scrutiny. And then there's also legislative risk. There's the risk that during the year you could invest into like say R&D, and then Congress changes the rules and disallows it, right?

0:39:18.0 KD: Sure.

0:39:18.3 MH: Those are very real risks. So you have to have some risk tolerance. If you want to participate in these, they are expensive. There's a lot of money upfront. So it just depends on what their risk tolerance is.

0:39:31.1 MH: We had a client come on board, I don't know, it's like call conversation six, eight months ago, who did a conservation easement three years ago, before they joined us, under audit from the IRS and it is not going well. And so they got a menu of choices from the company facilitating the easement, all not good options.

0:39:52.9 MH: And I got on the phone and we went through and I told her which option, which was basically pay the tax, you gotta stop the clock on this, penalties and interest. You already got three years and the attorneys, the army of attorneys with this company doing the conservation easement say it's gonna be at least a couple more years before they have resolution.

0:40:14.4 MH: We recommended of this menu of really horrible options, I would just pay the tax to stop the penalties and interest and maybe you'll get it back. So you have to have some I think high risk tolerance to look at those. But keep in mind you don't wander in, you walk into your local CPA and say, "Can you set up a conservation easement for me?"

0:40:33.0 KD: Sure.

0:40:33.5 MH: You're buying in, you're investing in a large company where that's all they do.

0:40:39.3 KD: And I really do feel like it's one of those things like weigh the risk to benefit ratio. Is it something you wanna do? But I feel for startup businesses, like take the main ones, get used to... Maximise all the not as grey deductions.

0:40:58.2 MH: Right.

0:40:58.9 KD: Because there's a lot of them out there, right? Like there's children opportunities, spouse opportunities, quite a few, home, different things like that that you can maximise.

0:41:07.8 MH: Absolutely. And so what we do every November, I send out a checklist and it's a secure web-based checklist, and it's top to bottom. I tell our doctors, "Hey, fill this out." If you're sitting there on the weekend wondering like, "What can I do? Am I leaving any money on the table?" I say complete our checklist.

0:41:33.5 MH: I call it the business tax savings maximizer. Okay, fill that thing out. And it'll tell you line by line all the things that need to be done by December 31. To get it into your books. 'Cause most of these just reduce reduce profit, right?

0:41:49.7 KD: Right.

0:41:49.7 MH: To save tax. So they need to be done by by 12/31. And that way they can go through the checklist and make sure everything is done by year end, so they can be very confident going into the spring that they did not leave any money on the table. And then when the tax return is filed, it's just, hey, it's your fair share. We avoided as much as possible.

0:42:13.2 KD: For sure. So I will do a non shameless plug of Dental A Team is also something people write off often. And so if you're thinking of consulting or you wondered and you're looking for ways to save, to reduce that profit, definitely something like so work with HDA, they'll tell you you've got this extra money and then hire Dental A Team.

0:42:33.7 KD: You're gonna then grow your business exponentially the next year. You're gonna have more in tax the following year and it just becomes a fun game. But hey, we made you way more profitable, which is never a sad thing. But I feel...

0:42:45.2 MH: Your fees and our fees are fully tax deductible.

0:42:47.4 KD: A hundred percent.

[laughter]

0:42:49.0 KD: Why not do these things? And I know I had a CPA, he told me, he said, "Kiera, when you buy these things and you spend money on them, you just kick the can down 'cause then you're gonna have to keep using 'em."

0:43:00.9 KD: I'm six years in and I still am finding lots of things that I can still spend money on. So I feel like if it's going to... But I always caution for myself especially, and Morgan, you're the CPA, I'm not, is make sure that the things I'm purchasing to reduce my tax bill are things that are actually going to generate an income for me the next year.

0:43:19.8 MH: Absolutely.

0:43:20.7 KD: Or things that I'm already using. Like I buy a ton of flights, we pay for our CPA, things that I'm going to do anyway, just to reduce it that year.

0:43:28.8 MH: Absolutely. Don't spend money to save money on tax. And you mentioned one, the 6000 pound car. I had on the phone with a doctor one time and he was just, "I heard I need to buy a 6000 pound SUV." And I said, "Do you need a suburban? Do you need an Escalade?" "Well, no." "Well then don't buy it." [chuckle]

0:43:51.8 KD: Correct.

0:43:53.3 MH: You don't need that. If when you spend money to save on tax, you're trading $100 bill for 60 bucks. I mean it's like, I'll do that. Give, I'll trade you.

0:44:05.8 KD: If anyone wants to do that, Morgan and I are in business for that. We'll definitely.

[laughter]

0:44:09.5 MH: Right. So, yeah, always certainly get what you need. And I tell our doctors, "Look, if this will help your practice clinically or operationally help you have the the business that you want, then yes, make that investment. Write it off. If not... "

0:44:25.9 KD: Don't do it.

0:44:26.4 MH: Save your money, distribute it, take it home. Have a nice life.

0:44:30.6 KD: For sure.

0:44:32.3 MH: Don't spend money to save on tax.

0:44:33.4 KD: So I think Morgan, as we wrap up, I feel there were a lot of takeaways. One is 23,000 per operatory should be the production. I feel like that's a really healthy metric for you to then go look at and see, "Are we within the trends or are we not within the trends?"

0:44:46.5 KD: Next thing is, I feel like I understand profit more, with paying yourselves and how to do it and why to put it below the line item. My throw-out is make sure if you're running a business that it's profitable, otherwise go be an associate. So like definitely let's have a job that pays you not that's less than being an associate.

0:45:06.1 KD: And then I love all these ideas around tax and why planning for tax is so hard. And I will say for those of you who geek out like I do, I literally look at the profit every single month. I have a nerdy little spreadsheet over here. I look at my profit, I have my estimated tax percentage and I put that money into a savings in Ally currently. I know they're not as high, but I am accruing interest on those waiting for the quarterly.

0:45:29.8 KD: So it's not a lot, but if I'm gonna do it anyway, why not save? And I will tell you last year was the first year Morgan, I did not cry at tax season. Because I had planned more by doing it every single month. So I think...

0:45:43.3 MH: I like tax season without tears.

[laughter]

0:45:45.3 KD: You and me both. And then also really I think the biggest highlight is there is so much value in a tax or dental specific CPA. I love the tax maximizations scorecard you guys send out, that you send out the quarterly report. So you guys are sending them monthly where we're showing what you should be doing based on industry standards. Where you show them what their month, like, what they need to have in a rainy day fund for the business. Those pieces, I feel make a business less stressed, happier, and more profitable.

0:46:16.1 KD: So Morgan, those are my like non shameless plugs. I truly think you guys are leading experts in dental-specific CPAs. And if anybody's been struggling with their CPA, you don't feel confident, Morgan, I think that you guys have taken the fear out of taxes, the fear out of knowing what your business should be doing and you make offices more successful and more secure.

0:46:35.7 KD: And so I would just say if anyone's interested, they're looking, how does it work? How can they connect with you? Because you work with so many of our clients and I love what you guys do.

0:46:44.0 MH: We do. And so, it starts with an initial consultation. You can book those on our website, hdagroupdental.com. You can email me. The initial consults, I still do those personally, as does Courtney, my business partner. We want that to be a very, very personal touch.

0:47:00.8 MH: And we will always stick with our core mission, is just private dental, doing our three core value propositions of accounting, profitability advising, and tax. That's all we do.

0:47:11.8 MH: So yeah, they can, email me [email protected], jump on our website, number of ways to schedule there. Would love to talk to your listeners about their dental practice.

0:47:22.3 KD: I love it. Be sure to tell 'em Dental A Team sent you. They take great care of all the people who come from this. So Morgan, thanks for geeking on taxes with me. I used to hate tax convos 'cause I felt dumb, and you broke it down so simply, so easily. So thanks for the time today.

0:47:36.9 KD: Simple and easy, I like it.

[laughter]

0:47:38.9 KD: Alright guys, well as always, thank you all for listening and I'll catch you next time on the Dental A Team Podcast.

[music]

0:47:45.8 KD: And that wraps it up for another episode of the Dental A Team Podcast. Thank you so much for listening and we'll talk to you next time.

[music]