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CPAs (and father-son tandem), Don & Dave Mantyla, talk all things taxes and explain the most common mistakes that put dentists at odds with Uncle Sam. They discuss the primary tax problems faced by dentists, the ramifications of making extra debt payments, when equipment write-offs make sense, and how some dentists get caught in a downward cycle of tax avoidance.
Reese Harper: Welcome to the Dentist Money Show. This is your host, Reese Harper, and we are on a special edition with two close friends of mine on the industry expert series today. Mr. Don Mantyla and Dave Mantyla, his son. I’ve known these guys for a long time and I was really excited to have them in for the show. I’d like to start by just having you guys introduce yourselves—Don tell people a little bit about yourself and how you came to be the tax man.
Don Mantyla: Sure Reese. Thank you for having us today; it’s great to be here. We’ll try to add a little bit of knowledge to our experiences we’ve had. I’ve grown to really appreciate and enjoy the dental profession. A lot of it happened in my early years—my father was a dentist and practiced for 20+ years before he sold his practice.
Reese Harper: That’s interesting how did I not know that? So you got to see first hand how it went down.
Don Mantyla: And so just a little bit more background is that I was actually pursuing a dental career. I went to the university, got a degree in Biology and was going to go that path, and then for some crazy reason I decided to pursue a business path. Then I ended up with an accounting degree. As a result of my father having introduced me to the dental profession and understanding how it works in the home and seeing a little bit about what he did with his “book work” is what he called it at night, I had a chance to get a little feel for the numbers. And so now we service a lot of dentists and enjoy that a lot. We see that they are great people and have a lot of great things that they do. We’re excited to work with a lot of dentists.
Reese Harper: I’ll have to ask more questions about seeing dentistry first hand then. Dave, how about you man?
Dave Mantyla: Growing up in a household with a father who is a CPA, I kind of did the family books a little bit growing up and got the bug for accounting. I like when things balance. I graduated from college; I went and worked in the industry. I worked as an assistant controller in a cost accounting industry, and then I joined the firm in 2005. So I’ve been doing that and kind of following along in the footsteps of at least working with dentists. I’m kind of our primary dental CPA.
Reese Harper: Let’s jump into a few ideas—you guys have both have a lot of experience. You’ve worked with a ton of dentists; you’ve seen a lot of great things that they have done. You’ve seen a lot of mistakes. And I think what a lot of people try to figure out from getting expertise from people like you, especially on a show like this is: what are some of the mistakes that you guys see that are maybe the most common either misunderstandings or mishaps that you feel like dentists make? Let’s start with Don and then Dave let’s have you chime into that and add to it as well at any time.
Don Mantyla: Sure, Reese. Let’s talk about for a minute one of the primary problems we see, especially with a newer practice is that a dentist comes out of school with a lot of debt generally; he also will a lot of times purchase an existing practice so that means that he accumulates more debt. A lot of times he will also then get into some personal debt having a home and such. It seems like a lot of the younger dentists, which this is not a bad thing or a criticism by any means, but they have this desire to get out of debt as quickly as possible. And that’s good; that’s smart for a long-term perspective and planning. So what happens a lot of times is as collections start increasing and the dentist gets passed his payment of his regular payables and his bills each month, he sees this cash start to accumulate and he thinks what he will do with that is pay down some debt. A lot of times he wont consult with his advisor—whoever that is whether it’s another CPA or his financial advisor or banker, whomever. But he won’t necessarily talk about what’s the smart debt to pay down and usually those are debts that may have higher interest rates and maybe have shorter term and he takes all of his excess cash and pays down debt without thinking about other ways that he may need that cash. For instance, we don’t really understand how we are accumulating a tax liability. When we start to have cash accumulation that means that there’s going to be some tax.
Reese Harper: So just to slow down a little bit because a lot of guys are going to start tuning out on us as soon as we start talking numbers. Sometimes I do that. So you’re saying—I start out; I’ve got all this debt, and my collections pick up. I’m starting to see my business bank account have some cash in it. My first reaction since I’ve been told to get out of debt, and I’ve got all this debt piling up, is the smart thing to do would be pay some of this stuff off. But when I go to write that check and I pay that debt off, I don’t realize that I probably owe some taxes sometimes, and I’m giving up my cash. Now I’ve got no cash to pay the tax bill, and I’m kind of in a bind and didn’t realize that. Right?
Don Mantyla: Yeah, and when you’ve paid all that debt down with your existing cash, then it’s tough to get that cash back to pay your taxes if you owe them. What a dentist really needs to do is to get with an advisor and maybe do some planning—talk about here’s how much I’m going to owe in taxes this year and at least put that money aside so that he or she can have that money set aside to pay the taxes. Because there’s always a tax day when that’s going to be due.
Reese Harper: I think people would be surprised, especially the younger guys—they would be surprised to know that when I pay down debt, it doesn’t necessarily mean that my income went down. That’s not a tax deduction; it’s not something that makes my income go down, right?
Dave Mantyla: I think that’s one of the big keys is understanding what is deductible. It may decrease your cash, but it’s not going to decrease your tax bill. I think one other piece I wanted to add onto this is that they have been deferring this tax liability for years. Initially, you have a lot of investment up front that you can write up and defer those taxes.
Don Mantyla: Because of depreciation and things like that.
Dave Mantyla: Yeah. Because you have accelerated methods and those have even increased now—the IRS has made certain permanent and bigger amounts so you can write off a lot more. I’ll try not to bore everyone with that.
Reese Harper: These are the numbers guys here people—they’re smart. Just backing up for one second; I think sometimes people don’t understand the difference between income and a write off or depreciation or an expense. I think it’s maybe important to clarify to people that when you have income or when you make money—when you’re finally showing some business checking account balance profit and you see stuff pile up, that you can do things to make that income go down, and those things are what Dave was just mentioning. You can buy something; you can incur an expense that will bring your income down, but that’s not always the right thing to do every year. You do need to make sure you’ve got some cash around to pay taxes like Don said. Because you might think that throwing money at a loan brings that income down when it really doesn’t. That isn’t an expense, right? Paying money towards a debt is not an expense, and it’s not something that makes your income go down.
Dave Mantyla: Yeah, and I think the downward cycle that they get into is that they’ve been deferring those taxes and now they’ve got a large tax liability, but they may not necessarily have the funds to pay that tax liability. So what they do or oftentimes what I see is they go and buy more equipment, which is fine maybe you need it, but to me you shouldn’t buy equipment as a tax strategy. You should buy equipment to build your company.
Reese Harper: I think that’s really good advice. If you ask yourself the question: if I didn’t get a write off for this, would I still buy it?
Dave Mantyla: Right.
Reese Harper: Do you ever talk to clients about that Don?
Don Mantyla: We do all the time because that’s a question that’s asked invariably every single year by pretty much every dentist.
Reese Harper: Should I buy this? Should I buy that?
Don Mantyla: Right, and Dave makes a great point because he’s right. It’s not smart to spend money on something that’s just a tax write off if you don’t need it—a piece of equipment, extra supplies, whatever. Some of those things just don’t make sense. I was also going to say with regard to not using all your cash to pay down debt: we have found over the years if a dentist is disciplined and will have a structured plan for wealth creation or wealth building—in other words setting aside money in a retirement plan, especially a qualified retirement plan like an IRA or 401K—that’s a tax deduction, but it’s going to towards retirement. That’s kind of the best of all worlds because you get a tax deduction, plus you still have the money. It’s your money in the future.
Reese Harper: I’m going to restate this from the non-tax point of view. So if I put money into a retirement plan or put it aside even if it’s not in a retirement plan, that increases what I’m worth. My wealth or what I’m worth is increased, where when I buy a piece of equipment, I do get the short-term benefit of paying less tax, but we all know how much that equipment is going to be worth in five years. While I got a short-term deduction, my wealth wasn’t increased. I didn’t increase my wealth. Sometimes I think people run away from taxes to buy things that aren’t going to be worth anything. Sometimes it’s better to maybe pay the tax at a rate that is fair and start building some wealth, but I see people running around making those decisions like Dave said. It’s tough to know sometimes when you should defer the tax by buying a piece of equipment or doing something versus just to pay the tax. What do you usually tell people when they are trying to make that decision?
Dave Mantyla: I think the biggest key is to look at tax strategy as an overall view, not with a short-term concept in mind like we talked about.
Reese Harper: A tax minimization view is not necessarily the right paradigm.
Dave Mantyla: Right. Bigger picture because—and I’ll give a quick example here. At the very beginning of a career, you will have a lot of capital improvements and things that you can write off.
Reese Harper: Which makes your taxes be very low.
Dave Mantyla: Yeah, your tax rate is low. And so I kind of make the argument—let’s say your tax rate is 15% right now. Why save something on 15% of tax rate when you can defer it over 5-7 years and then even increase that when your rate is going to go up to 35% and so you kind of defer that. I understand time, value, money and all that considered, but still—overall you probably are going to have a better tax savings. So if you’re not just looking at year one, but you’re looking at year two, year three, year four, etc, your overall tax savings could be bigger.
Reese Harper: That’s such good insight. I really like that, and I think sometimes the way that taxes are paid, I don’t think people realize that there’s not one rate they pay. There’s a set of rates, and you guys call that a tax bracket, and if I wait sometimes to pay tax until next year, it could be the equivalent of actually getting a rate of return on my money, right? Because if one year I’m in the 25% bracket—meaning if I buy a piece of equipment I save twenty-five cents on the dollar, and I’m in November and it’s painful and I know I’m going to pay taxes so I’m really excited about this piece of equipment. But by waiting, even three or four months because I know that next year I’m going to even have more collections and more income, I could save anywhere from 5-10% more potentially by just waiting another calendar than taking that deduction all in one year. Is that an easy way to summarize it or would you say that any differently?
Don Mantyla: That’s exactly right. That gets back to the point I was trying to make about planning, and Dave’s saying the same thing is that we’re talking about planning because if you have a long-term plan in place and thinking through it, he’s right and you’re right. You want to not necessarily even have that tax deduction this year. Pay that low rate of tax because in the future, because of our accelerated rates here in the United States tax system, we will actually get a better bang for our buck.
Reese Harper: Sometimes the way I think of it for some dentists is it’s better to pay a lower average rate over your career than have kind of a wild swinging rate. Because a lower average rate means that you’re doing good planning, where if you’re jumping up and down in extremes, you may end up paying more tax than you would otherwise. Anyway, I think that’s a really good concept to highlight. When people come and they say, “I want to buy this piece of equipment.” How do you guys determine whether you should expense it in one calendar year or maybe take it over five or seven? What are there options and what does that really mean to take it over a period of time versus take it in one year?
Don Mantyla: Right, and Dave eluded to this just a minute ago—under current tax law, and this law was just passed in December—where it is now a permanent law where you are able to write off pretty much any piece of equipment you purchase. You have that option of writing it all off from the first year; in fact you can even buy a piece of equipment and put it to use on the last day of the year, December 31st, and you can write off the entire cost of that whether you pay cash for that or finance all or some of it. So if you bought a $20,000 piece of equipment and financed all of it, you still get that $20,000 deduction that year. The problem with that is that you still have to pay the cash to pay off that debt in the future, so you are creating what Dave has said is that you’re deferring your tax liability. You’re getting all that tax savings, but you have to pay the piper at some point.
Reese Harper: And life never gets cheaper it seems like.
Don Mantyla: So you have the option of either writing it of all in one year, or the IRS has specified rates for different tax of equipment or different tax of capital purchase they call them. For dental equipment for instance, is it 5 years?
Dave Mantyla: Five years is typical, yeah.
Don Mantyla: So in other words, you can buy that equipment and write it off over five years which may be the smart thing to do because as Dave has mentioned, you’re in a higher tax bracket in the future, and so those depreciation of dollars that you’re writing off on that—you get a better result or better rate of return on that.
Reese Harper: Let’s change directions here a little bit and say, Dave, how early in the year do you recommend people reach out to start thinking about this kind of stuff? What’s the time frame?
Dave Mantyla: That’s one thing I was going to say—if my client comes to me in December and says, should I buy this piece of equipment? Hopefully we would have talked about this in April or May or June. I’ll just say, you need to have planned more than just in December, and you definitely need to plan more than April the next year. You know?
Reese Harper: So you’re saying most people kind of think about this after it’s too late.
Dave Mantyla: Right. And I understand that taxes are clearly my livelihood, and so I am thinking about it all year long. But I’m also trying to be proactive reaching out to clients all year long. You should have proactive planning and a proactive advisor helping you throughout the year. Not just when the extreme events come along like a sale or a buy of a practice, but all throughout the year you should be meeting maybe quarterly to go over the taxes and have clean records. I know you have mentioned having good records and good books so that at the drop of a hat you can do planning. It shouldn’t be this huge event once a year.
Reese Harper: I don’t think people like to pay for planning kind of like sometimes we don’t like to do our exercise every day and some of the boring stuff that makes it so when we go skiing we don’t get injured because we’re doing some exercise every day. So what would you guys say the CPAs role is there though? This isn’t a dig at the industry, but a lot of guys will blame this on their CPA and say, “it’s his fault; he didn’t call me.” And I know from my perspective that it’s not that simple. And there’s probably a balance between the client being aware and trying to reach out and being proactive and then the CPA being proactive. It’s probably not a one-way street right? What’s your perspective on that? Is it easy to reach out and touch base with clients as often as they want to be called?
Don Mantyla: We were talking about that just the other day how you could say—and it’s probably accurate—it’s the advisor or CPAs responsibility to have a list of his clients saying who he needs to meet with and reach out to. Unfortunately, that doesn’t always happen and yes we can blame the CPA and yes that probably is his fault and responsibility. But Dave and I were talking about the clients we like the best—the dentists we enjoy the most working with are those ones who have at least an understanding that they are going to pay some taxes at some point, and we would like them to even reach out to us and say, “hey what if we got together?” So in other words, it’s easy to place blame. We all do it.
Reese Harper: That doesn’t make the problem get better does it?
Don Mantyla: That’s right, not at all.
Reese Harper: I like to tell our clients that ultimately you are the entrepreneur. You need to get a little bit of knowledge and use that knowledge to make some proactive decisions. You can’t outsource everything when it comes to tax or your finances, and at some point you’re going to pay the cost of neglecting that learning curve. And I think if a client would reach out once a year in June or July or early fall, that gives them plenty of time to get your ducks in a row and make good decisions. But I feel like people wait until the pain is there. And in some cases you could probably say it’s a two-way street though. It’s up to the client who’s got the ultimate responsibility, but I think a little bit of prodding can help too.
Dave Mantyla: You know I think a dentist would certainly sell his patient on this that you need to have proper maintenance of your teeth throughout the year, not just when you feel the pain of an abscess of whatever. That’s not the time to go to the dentist; it’s well before.
Reese Harper: Yeah that’s great insight. On a different subject here, what are some common tactics you’ve seen people do to reduce their taxes that you wouldn’t recommend? Things that people chase or things that people say they want to do because it’s supposed to lower their taxes, and it kind of gave you some anxiety. Are there any things like that that make you wary as a CPA?
Don Mantyla: Yeah let me jump in first then I’ll let Dave jump in here. I think what we’re talking about is when is a client becoming too aggressive? What we have seen happen is when a dentist’s career develops he pays down his debt and does very well that way, he attends to accumulate some cash and disposable income and he will say he would like to buy a boat—and by the way how can I write that off? I take patients out who happen to be my children and my wife and my cousins, aunts, and uncles. They are all patients of mine; so this obviously is a clear business write off, right? No. It’s overreaching is what it is. And that’s something that it’s either that or other types of things like a motorhome. Sometimes even a very expensive car—they don’t understand that a very expensive car doesn’t necessarily get you better deductions.
Reese Harper: I think all three of those things aren’t things that increase your wealth, right? They don’t build your net worth. Are we letting the tax tale wag the dog? And when should you chase down a deduction versus keep the money and just get wealthier?
Don Mantyla: Those are just a few that come to mind—Dave what other things can you think of?
Dave Mantyla: Well, my question was going to be are we talking about gray areas? Is that where we’re going?
Reese Harper: No we’re just talking about things that make you uncomfortable.
Dave Mantyla: I mean hopefully this isn’t a tangent, but we will have a client come to us and he’ll say, “my neighbor is getting money back, and I’m owing—why?” And that’s it; that’s all the context they will give us. We don’t know what that neighbor makes; we don’t know if they have overpaid during the year; we don’t know anything about it. We don’t know where they are in their career or anything. And then we are asked to give a synopsis as to why their neighbor is getting money back and they are not.
Reese Harper: I think that’s really good. We see that a lot—that will usually lead to a decision after they have that happen right? The neighbor didn’t pay tax; consequently I should be doing whatever someone else is doing.
Dave Mantyla: Exactly.
Reese Harper: And that’s a different situation entirely. Their income is different and their career is different. No one really talks about how much you made in context.
Dave Mantyla: That’s what I always shoot back, and I say—go and ask him what he made last year. I guarantee he won’t tell you that.
Reese Harper: I think there’s this idea that somehow taxes are negotiable based on the savvy of the payer. The more savvy the dentist the less he pays, and the savvier the CPA is, the more they can skirt around the IRS. There’s this common underlying theme that smart people can avoid paying tax, and I just think not everyone feels that way, but I do feel like the less tax knowledge people have, the more they might feel that way.
Dave Mantyla: And Don and I were talking about this too—ultimately, both the preparer and the taxpayer sign that tax return. And I’m not saying that the taxpayer has to have a full working knowledge of every piece that’s made up of that return, but they do need to understand that they have a responsibility to sign that and agree with what’s being reported is correct. And so we as advisors do our best to provide the most tax benefit you can get or whatever you want to call it, but ultimately you both sign that tax return.
Reese Harper: That’s great insight. I think too often people feel like once that return is filed and it’s done, they got away with it. It’s kind of behind them. So I think we want to talk real briefly, that just because I file a return a certain way and I didn’t get a phone call—what am I liable for? How long is my tax return available to be audited before it’s done and gone? And I don’t think people really understand how filing a tax return really isn’t the end of decision on that return. So can you explain that a little bit?
Don Mantyla: That’s a great question: how long am I liable to be looked at or audited or be responsible for back taxes? The common number is three years, and that three years is contingent upon a few different things. One of the things—there are due dates when returns are due and sometimes tax payers get extensions for more time to file their returns, so you have to take those additional months into account. And then there’s also a requirement there that you don’t substantially understate your income. Not necessarily fraud.
Reese Harper: Yeah there’s a big difference in understating income and taking deductions. I think sometimes people don’t realize that those are very different things. Taking an aggressive stance on deductions is very different than hiding income.
Don Mantyla: So if you hide income—let’s talk about that. If you hide income, there is no statute. In other words, you are responsible forever.
Reese Harper: When you rob the bank, you are liable to give the money back eventually. And then deductions—there are roughly three years my tax returns can be reviewed. Is that a fair way to look at it?
Dave Mantyla: Understanding the deadlines, the filing deadlines, Don alluded to this. The typical individual tax return is due April 15th, and if you extend you have until October 15th. And so the statute doesn’t start until you actually file or that extension date. That’s one thing to keep in mind.
Reese Harper: Well, these have been great insights guys. I think we’ll leave with parting thoughts here if you have anything you would like to leave our listeners with to keep our dentists moving in the right direction. Don do you have any final thoughts you would like to leave?
Don Mantyla: Well just a quick thought—and this is something I have thought about common mistakes that dentists make again. And that is a lot of dentists believe that they are only taxed on the money that they take out of the practice, and that’s not necessarily accurate. You would say well that makes sense just thinking about that, so let’s say I have a corporation where I get a salary through my regular wages, and I also take money out called distributions or draws. They add those two together and say that’s my income. That’s not true because the way the tax law works is you’re also taxed on money that you have received in your practice, so collections. But you’ve elected to take that money and pay down debt, so the payment of debt again is not a tax deduction—so that’s part of your taxable income, or if there’s other things that add in there. So again, this is where planning has to come in to play and a good advisor would help you to understand what really am I going to be taxed on this year.
Reese Harper: Yeah, so if money piles up in my practice checking account but I don’t take it out, I’m still liable for that. If I pay down debt, I’m still liable for that. That’s still income. That’s great insight—a lot of people miss that I think. Well thanks again guys; it’s been a pleasure. This is excellent information, and everyone’s going to love it. I really appreciate it and I look forward to having you guys on the show again.
Don and Dave Mantyla: Thank you, Reese.Taxes