How Will the Economics of 2020 Affect Your Taxes? – Episode 258

What you need to know about PPP, HHS, and EIDL federal support when it comes to your taxes. 

On this episode of the Dentist Money™ Show, Ryan interviews Morgan Hamon of HDA Accounting Group, a dental-specific CPA firm. In 2019 the acronyms PPP, HHS, and EIDL didn’t exist. In 2020, these special COVID loans and grants are top of mind. 

With tax season coming, Ryan and Morgan discuss loan timelines, what you need to know about their qualifying rules, reporting requirements you may be anxious about, and maybe most importantly, IRS guidelines on the money you may have received.

Show Notes
www.hdagroupdental.com
(303-799-0476)

 

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Podcast Transcript

Ryan Isaac:
Hello, Dentist Money Show listeners. Thanks for joining us on another episode of the great Dentist Money Show. Today, we have long time partner and friend and a really smart CPA for dentists all over the country, Morgan Hamon from HDA Accounting. Today, we jump right into all of the COVID government loan things going on; repayment programs, taxation of these loans. Some pretty surprising things. We talk about how much cash to keep on hand, what’s normal before pandemic and what’s normal after pandemic. Then we talk about a few year-end action items for tax planning. When is the right time to buy new equipment, new things for the business, in order to get a tax write off? When does it not make sense?

Ryan Isaac:
Thanks to Morgan for being on the show. We talked about a lot of great subjects that are really important for everyone to cover this time of year and will be helpful in the future as well, so thanks for tuning in, thanks for listening. If you have any questions for us, you want to chat, just go to DentistAdvisors.com, click on the Book Free Consultation button and chat with one of our very friendly dental-specific financial advisors any time on your schedule. Thanks for tuning in, thanks for listening, enjoy the show.

Announcer:
Consulting Advisor, conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now, he’s your host Ryan Isaac.

Ryan Isaac:
Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I am your host, Ryan Isaac, joined today by a long time friend and CPA to dentist’s extraordinaire, Mr. Morgan Hamon from HDA Accounting. Morgan, what’s up, man? Thanks for joining us. How you doing?

Morgan Hamon:
Doing well. Thanks for having me.

Ryan Isaac:
Yeah. It’s a good day. Coincidentally … Let’s just give a quick shout out. Today is Veteran’s Day. We are recording this November 11th, 2020.

Morgan Hamon:
Yeah.

Ryan Isaac:
Tell us real quick. You flew cool jets. To this day … I’m a 40 year-old man and to this day if I’m ever driving near an Air Force base … It happens a lot near San Diego or near Vegas a lot. And if I hear those jets screaming overhead I feel like a five year-old boy again. I’m just like, “Oh, look at those planes! Look at those planes!” My wife’s always like, “I guess.”

Morgan Hamon:
Yeah.

Ryan Isaac:
I just think it’s a cool thing. Shout out to your service and you-

Morgan Hamon:
Sure. It-

Ryan Isaac:
-flying planes at some point in your life, huh?

Morgan Hamon:
Yeah. My entire family, we’re all CPAs. It’s in our DNA. But I was the rebel.

Ryan Isaac:
Okay.

Morgan Hamon:
In college, the Navy paid for my undergrad and then I went in, so I was a Navy pilot for 11 years, flew F-18s, carrier-based. If it’s on video, I got the picture behind me there. It’s what I flew.

Ryan Isaac:
What is that in that picture? That’s an F-18?

Morgan Hamon:
F-18.

Ryan Isaac:
And that’s taking off or landing there in that picture?

Morgan Hamon:
That’s just about to land on the carrier.

Ryan Isaac:
Yeah, okay.

Morgan Hamon:
Yeah, I did that for 11 years. Had a lot of fun, a lot of good memories, lot of time away from home.

Ryan Isaac:
Yeah.

Morgan Hamon:
But, yeah, appreciate the shout out.

Ryan Isaac:
Yeah. Well, thanks for your service and everyone listening. We have a lot … There’s so many dentists out there who begin or continue their dental careers in training in the military, in the service.

Morgan Hamon:
I know.

Ryan Isaac:
Thanks for all you guys do.

Morgan Hamon:
Absolutely. We have a lot of clients. A lot of former military docs.

Ryan Isaac:
Yeah, begin that way, so very cool. I talked to … Coincidental … I’m curious if you … Do you talk to a lot of students that are considering military just because of loan situations?

Morgan Hamon:
Not really. I don’t have a lot of contact with students just because our clientele is all practice owners.

Ryan Isaac:
Yeah.

Morgan Hamon:
So, usually when I meet doctors, they either have a practice or they’re thinking about the start up or that first time purchase.

Ryan Isaac:
Yeah. I’ve heard that more and more lately as the student loan balances keep getting bigger and bigger and bigger.

Morgan Hamon:
I tell you what, it is … Our clients that did the military first, not having those student loans …

Ryan Isaac:
Yeah, it’s a big …

Morgan Hamon:
… really makes a big difference.

Ryan Isaac:
Last military question. Did you pre-military, during or post ever enjoy the movie Top Gun and think it was cool?

Morgan Hamon:
Oh.

Ryan Isaac:
Or [inaudible 00:04:09][crosstalk 00:04:09]

Morgan Hamon:
Yeah.

Ryan Isaac:
Mav.

Morgan Hamon:
I was in high school when that came out and I really … Obviously, like everyone else, I really liked it. Of course, now it’s a little painful to watch.

Ryan Isaac:
I’m sure.

Morgan Hamon:
Just because it’s so absurd.

Ryan Isaac:
[inaudible 00:04:25] insanity. Like, “You don’t push that button and you don’t do that thing and you don’t ride motorcycles on the tarmac.”

Morgan Hamon:
Everything is pretty … I’m trying to think if there’s on realistic part of that movie.

Ryan Isaac:
[inaudible 00:04:35]

Morgan Hamon:
But it’s a great flick. You got the second one coming out.

Ryan Isaac:
Coming out sometime.

Morgan Hamon:
Which is really ridiculous because Tom Cruise … What is he? 56?

Ryan Isaac:
Yeah. He doesn’t age so they keep having him play a 30 year-old.

Morgan Hamon:
He’s just so …. It’s just such an age inappropriate role because once you’re past 50, you’re not flying at all.

Ryan Isaac:
Maybe he should just be an instructor or something.

Morgan Hamon:
Yeah.

Ryan Isaac:
Before we jump into things today, I just want to give another shout out. Dentist Money Show is sponsored by Dentist Advisors, a comprehensive fee-only financial planning firm just for dentists across the country. Check us out at DentistAdvisors.com.

Ryan Isaac:
Today, Morgan, give us a quick … Tell us a little bit about yourself, your role as a CPA for dentists. You only work with dentists all over the country.

Morgan Hamon:
Right.

Ryan Isaac:
HDA Accounting. Just give us a little bit of background there and what you guys work on.

Morgan Hamon:
All right. Yeah. Quick synopsis. I’m president and co-founder of HDA Accounting Group. We’re a national CPA firm based out of Denver and we work exclusively and only with private dental practice owners. It’s all owner-operated practices. We don’t do corporate dentistry or large DSOs. Your organization and ours, we share that commonality.

Ryan Isaac:
Yep.

Morgan Hamon:
It’s all owner-operated practices. And we focus on … I guess I’ll call it financial accounting. Some people will think of it as a bookkeeping or the monthly accounting. It’s critical to have that data every month. And then we prepare a monthly practice profitability analysis, which is a full color dashboard-stype report to give our doctors timely, consistent feedback all year long. That’s step one, make sure we have data to analyze, make decisions. And the whole intent is to improve profitability so we’re making as much money as possible. And then the following piece of that, of course, is tax planning. Once we’ve made that large pile of money, hopefully, we want to hang onto as much of it as we can, so that is tax planning, which is a huge part of what we do.

Morgan Hamon:
The third leg is … I call it advising rather than consulting. We’re not dental consultants but we do like to be very hands-on and help. That’s what we do. We’re accountants, we stick with that. We don’t try to be everything to everybody. We’re not the financial planners; that’s you guys. We’re not transition brokers.

Ryan Isaac:
Yeah.

Morgan Hamon:
We don’t play attorney. We’re serious CPAs and accountants and that’s what we stick with.

Ryan Isaac:
I like that. It’s respectful, man. How long have you guys been doing this for? It’s been a long time.

Morgan Hamon:
Dental specific since 2010, so I’ve been at it 10 years now.

Ryan Isaac:
That’s awesome. All right. Let’s go to first topic, here; one of the most obvious and currently ongoing topics right now. If you’re listening to this show later, maybe a year or two down the road, we’ll try to make some of this advice relevant for future situations that could be similar. But right now it’s 2020, we had the shutdown, we had government loans, we had all the stuff that 2020 has served up to us on a silver platter and continues to do so.

Ryan Isaac:
Let’s just start with what are you doing with clients right now? People have extra money [inaudible 00:07:54][crosstalk 00:07:54]-

Morgan Hamon:
So …

Ryan Isaac:
-forgiveness, all this stuff.

Morgan Hamon:
It’s a big, big topic, so we’ll cover a couple things.

Ryan Isaac:
Yeah.

Morgan Hamon:
Let’s start with PPP.

Ryan Isaac:
Okay.

Morgan Hamon:
Because that’s the largest amount of relief that most of our clients received. Currently, as of today, November 11, I think first and foremost what’s on everybody’s mind is just the forgiveness. And that process, we anticipate all of our clients will have full forgiveness. With the extended, the 24-week cover period, there’s plenty of payroll to eat up all that money. I just cannot see a scenario … Even for the clients that got it early and have the eight-week cover period, there’s plenty of rent, interest and payroll expense to eat up that PPP loan, so I have no concern whatsoever about the loan being forgiven.

Morgan Hamon:
Where there’s some concern now is just timeline. And it’s not time-sensitive as of right now. In fact, the banks are not … many banks are not ready yet to take the application.

Ryan Isaac:
Okay.

Morgan Hamon:
And the reason is even though the SBA easy form has been approved … It’s been approved for months … There’s still debate over what the final rules are going to be.

Ryan Isaac:
True to PPP 2020.

Morgan Hamon:
Right.

Ryan Isaac:
Yeah.

Morgan Hamon:
And there’s all this talk of maybe a second round, an additional stimulus, so it’s just going very slow. Here’s the bottom line for those doctors that are listening right now at the end of 2020 is if you took PPP and you spent all that money on payroll, you’re fine. If your bank has not contacted you yet, you’re not late.

Ryan Isaac:
Okay.

Morgan Hamon:
The banks want these PPP loans off their books just as much as you do, and so when they are ready to take that application, the banks will take that application most likely electronically at their bank because they’re the ones that ultimately will have authority to approve that loan. If the bank is not hassling you to turn in your application, you’re not late.

Ryan Isaac:
Good to know.

Morgan Hamon:
I think that’s the big key factor right now.

Ryan Isaac:
K. What about a few of the less common forms? Like the EIDL loan.

Morgan Hamon:
Yeah.

Ryan Isaac:
Some people got the grant and didn’t get the actual loan. Some people got the loan.

Morgan Hamon:
Right.

Ryan Isaac:
What have you seen with that?

Morgan Hamon:
Let’s talk, actually, HHS first.

Ryan Isaac:
Great. Okay.

Morgan Hamon:
And then hit EIDL last.

Ryan Isaac:
Okay.

Morgan Hamon:
Because HHS, I think, probably, if we’re going to look at the scale of concern of what’s going to happen with that, I’d say HHS probably ranks above EIDL.

Ryan Isaac:
Okay.

Morgan Hamon:
The thing with HHS … There’s been three rounds. If you took that money, it’s intended as revenue replacement for operating expenses. Payroll covers that. And by the time most doctors received HHS, they had either burned through their PPP money already or very close to it. There’s plenty of qualifying expenses-

Ryan Isaac:
Okay.

Morgan Hamon:
-between the time clients received HHS and December 31 to go through that money. So, that’s not a cause for concern. The reporting requirements for HHS, we’re not really hearing about that because I think everybody knows that’s going to be due starting in January. That’s obviously six weeks or so in the future. I have not seen the paperwork. The HHS, they talked broadly about some of the reporting requirements that they’re going to have but I’ve not seen an application.

Ryan Isaac:
Okay.

Morgan Hamon:
So I don’t have any data. That’s certainly not late.

Ryan Isaac:
Yeah, okay.

Morgan Hamon:
It hasn’t even started yet. That’s going to be in January. More information to follow there.

Ryan Isaac:
Okay.

Morgan Hamon:
So, nothing time sensitive right now for any of these programs that anybody should feel behind on.

Ryan Isaac:
Okay.

Morgan Hamon:
As of today.

Ryan Isaac:
Okay.

Morgan Hamon:
Now, EIDL, the reason I want to cover that last is that dovetails into the tax treatment for these loans. EIDL … Just to clarify, there are two components of EIDL. There’s EIDL grant, which is going to be $10,000 or less. And if you receive that, it was likely very early on in the pandemic and that would have been even $1,000 multiples up to $10,000. That is money that does not have to be paid back. An EIDL loan is going to be a larger amount. I have no idea what the … I don’t think anybody does … What the formula SBA used to determine the offer they made for those doctors that received an offer for an EIDL loan. But the EIDL loan, it’s a loan. It has repayment terms and you’re going to pay it back just like any other loan.

Morgan Hamon:
The rules for the EIDL loan is it is not intended to refinance other debt. And I think-

Ryan Isaac:
[inaudible 00:13:35][crosstalk 00:13:35]

Morgan Hamon:
-the first thing, everybody’s like, “Hey, I’ll take out paano equipment loan.” That’s not-

Ryan Isaac:
Oh, there’s the [inaudible 00:13:41] payment.

Morgan Hamon:
That’s not what it’s for.

Ryan Isaac:
Yeah.

Morgan Hamon:
I don’t know what the enforcement mechanism is but-

Ryan Isaac:
It’s vague, isn’t it? There were a lot of people saying, “This is kind of a …”

Morgan Hamon:
Yeah.

Ryan Isaac:
“Here’s how I’ll get around it.”

Morgan Hamon:
Here’s the deal … is if you have these moneys coming into your business, particularly with PPP and HHS funds covering a portion of operating expenses, which they’re intended to do, you will have some residual profit leftover by not having to pay those expenses and you could use that profit to retire other debt. What I would avoid is taking an EIDL loan and then the next day taking … paying off all these annoying equipment loans you have-

Ryan Isaac:
Yeah. Writing a big check.

Morgan Hamon:
-right in that time period because, again, I cannot quantify what the exposure would be for SBA if they looked into that, but it is clearly not within the intent of EIDL just to use it to refinance other loans. I would just be careful. It’s intended as revenue replacement basically to keep you in business.

Ryan Isaac:
Keep you in business.

Morgan Hamon:
To keep people coming to your office.

Ryan Isaac:
Yeah.

Morgan Hamon:
Yeah. The next piece there is taxes. And this is huge. This is very important. It’s very important all listeners, all practice owners understand this … is that the … When these programs were conceived by Congress or legislators, it was not intended that these were to be treated as income. It is money to give to small business owners to stay in business and keep people on payroll. The intent of-

Ryan Isaac:
Is there a however coming?

Morgan Hamon:
Yeah.

Ryan Isaac:
“However …”

Morgan Hamon:
There’s a big however coming.

Ryan Isaac:
Okay.

Morgan Hamon:
It’s not technically income and Congress also went so far as to say when PPP is forgiven … Typically, loan forgiveness is income. It stated loan forgiveness is not income. So, that’s all well and good. However …. The big however you’re talking about.

Ryan Isaac:
Yeah.

Morgan Hamon:
The IRS has taken the position that expenses paid … business expenses paid with this forgivable government money are non-deductible.

Ryan Isaac:
Okay.

Morgan Hamon:
Think about that. Basically, that’s just a backdoor way of making it taxable income.

Ryan Isaac:
Yeah.

Morgan Hamon:
The IRS has been very clear on that.

Ryan Isaac:
So, you pay $100 grand in payroll over that period of time … Just throwing a round number out there … And that is not a deductible expense in the business.

Morgan Hamon:
Yeah. Congratulations, you got $100 tax free but the payroll you pay is non-deductible. What this means is-

Ryan Isaac:
And this is the rule as of right now? It’s published?

Morgan Hamon:
This is the rule. Yeah. Absolutely. And so all of our third quarter and fourth quarter tax planning, we are factoring in PPP, HHS and EIDL grant; that $10,000 or less. That is all. We’re adding that to income.

Ryan Isaac:
Interesting. Here’s what has been … You’ve seen this undoubtedly, is everyone’s now holding more cash than they normally do. And there’s still a lot of question marks in dentistry, in the economy, in the next whatever six-12 months to come.

Morgan Hamon:
Yep.

Ryan Isaac:
Everyone’s like, “Well, I’ll hold this cash to be safe.” But maybe you’re saying, “Hold this cash because you’ve got a tax bill coming you’re not prepared for.”

Morgan Hamon:
Yes. And hopefully … We’re preparing our doctors early. We start talking about this with Q3 tax planning.

Ryan Isaac:
Okay.

Morgan Hamon:
We’re in the midst of Q4 tax planning right now, and so we’re preparing everybody for it now. Here’s the thing. I think to just … Here’s how I think about it. The government gave you $100 grand as an example. If your combined federal and state income tax rate is, say, 30%, you need to have $30,000 set aside for tax. What that means is instead of getting a $100,000 gift from the government, you got a $70,000 gift.

Ryan Isaac:
Still great.

Morgan Hamon:
It went from being an amazing deal to a pretty sweet deal.

Ryan Isaac:
Yeah.

Morgan Hamon:
It’s still all good.

Ryan Isaac:
A still glad we got it deal.

Morgan Hamon:
Right.

Ryan Isaac:
And this is probably where the question … You were touching on this before. Don’t assume you now are flush with cash and it’s time to go start all these big projects and drain it all quickly.

Morgan Hamon:
Right.

Ryan Isaac:
Look at the stuff that’s going to matter.

Morgan Hamon:
You definitely need … And hopefully … If our clients are listening, we’re factoring this in. We’re not going to have surprises. You need to make sure you visit about this with your CPA or whoever’s helping with your tax planning and make sure this money’s being factored in so you don’t get an unwelcome surprise in the spring.

Ryan Isaac:
I’m not sure this is on the radar of everybody.

Morgan Hamon:
Boy, it should be.

Ryan Isaac:
From the conversations I’m hearing.

Morgan Hamon:
It should be.

Ryan Isaac:
It’s just not coming up. In my mind, this is a reminder of why you pay competent professionals who understand your specific profession to do these jobs because complexities, they’re hard to navigate.

Morgan Hamon:
Yeah. All you need … And it’s quick math and if you don’t know your effective tax rates, just use 30%. For most successful-

Ryan Isaac:
Close.

Morgan Hamon:
It’s close enough.

Ryan Isaac:
Yeah.

Morgan Hamon:
Whatever your PPP, your HHS and EIDL grant … Add all that up times 30%. Just make sure you got that set aside.

Ryan Isaac:
Okay.

Morgan Hamon:
And maybe there’s some other deductions. Maybe you don’t need it all. But I’d sure rather have it. And, to your point earlier, we should be, I think, maintaining a higher operating cash balance, anyway. We can talk a little more about our opinion on that. One last thing I’ll mention on this particular topic, EIDL loan is a loan so that doesn’t apply. So, if you got offered $185,000 EIDL loan, that’s a loan just like anything else and you get to deduct the interest. It’s not applicable to the tax situation.

Ryan Isaac:
Okay. Matt, it’s time.

Matt Mulcock:
Time for what, Ryan?

Ryan Isaac:
It’s time to book a free consultation at DentistAdvisor.com. Just click on the big Book Free Consultation button on the homepage and talk to one of our friendly advisors today.

Ryan Isaac:
What’s some end of year stuff you’re talking about? What’s important about-

Morgan Hamon:
What comes up all the time end of year is, is it time to make investments in the practice? Everyone’s heard of section 179.

Ryan Isaac:
Yeah.

Morgan Hamon:
And those questions come up. And we’re certainly having those discussions with a lot of our clients right now. And I’ll just give you my … My philosophy on that is if you’re wanting to make an investment in your practice, a capital investment, big money, that should always be driven by clinical and operational needs and we’ll figure the tax out later.

Ryan Isaac:
Right.

Morgan Hamon:
Because you don’t want to get in the habit of spending big money to spend on tax because that just makes you cash poor in the long run. So, you need what you need for your practice. And so-

Ryan Isaac:
But it’s common, though, right? It’s pretty common for people to be like, “I’ll just go buy something even though I might not …”

Morgan Hamon:
Yeah, and here’s where the pressure comes on because it’s year end, the section 179’s been codified and the internal revenue period is like 2018, like a million bucks, which … That’s just a rounding there for General Motors. But in our world, that basically means section 179’s unlimited. But I think there’s this anxiety that gets created around this time of year … is, “Oh my gosh. I got to do something or I’m going to … quote, unquote … I’m going to miss out.” And this is the thing to keep in mind. No. Nobody ever misses out on anything ever. If you buy $150,000 sack, you’re going to recover that entire cost whether you take it all this year in section 179 or whether we depreciate that over regular accelerated depreciation. You always get the tax benefit so you never miss out on anything. Just make sure those decisions are informed by … Will this help you provide better care? Will it make you more money?

Ryan Isaac:
Yep.

Morgan Hamon:
Does it just make your life easier? Does it make you more competitive?

Ryan Isaac:
Yep.

Morgan Hamon:
Because it’s state of the art. Figure out those things. Make the decision based on that. And the tax, in my opinion, is secondary.

Ryan Isaac:
Yeah. Yeah, yeah. We talk a lot about that when people make suboptimal investment decisions because the tax break is nice. They take on more risk or enter an investment they don’t fully understand or are not prepared to take on just because the tax break is there and that shouldn’t be the driving factor in that decision.

Morgan Hamon:
I don’t think so. A lot of times it does line up, and so I-

Ryan Isaac:
Totally, yep.

Morgan Hamon:
This is kind of how I think about it. Say there’s an equipment upgrade on the radar that you know you really need to have it.

Ryan Isaac:
Yeah. You’re going to do it.

Morgan Hamon:
But we don’t necessarily need it tomorrow. Say there’s a time horizon of six months right now. We have the option of we could do it this year or early next year, but one way or another we’re going to do this because we’ve made that assessment based on operational and clinical factors. That’s when, okay, do we talk a bout this year or next year? If you have no other big deductions for 2020 and you’ve made good money, then yeah, this year might line up perfectly.

Ryan Isaac:
Yep.

Morgan Hamon:
Or maybe you bought a practice. We have a few clients where they literally purchased and closed on their practice March 1.

Ryan Isaac:
Yeah. I’ve talked with a few.

Morgan Hamon:
Can you imagine that?

Ryan Isaac:
Man.

Morgan Hamon:
Maybe they don’t need it this year because they not only have a purchase to deduct … They bought a lot of used equipment of good will and they have a number of deductions this year already so maybe that would be more valuable next year.

Ryan Isaac:
Yeah, push it off.

Morgan Hamon:
It could be that tax could be more valuable next year. I think if it satisfies that criteria, we’re going to do this one way or another because it’s good for the practice, good for you as a clinician, then we can just talk about the timing. This is important, too, Ryan, is if … Say it’s decided this year. We want that deduction this year. That equipment needs to be placed in service in 2020. And we should take a few minutes to talk about what that means.

Ryan Isaac:
Placed in service means something.

Morgan Hamon:
It means something.

Ryan Isaac:
Yeah.

Morgan Hamon:
You cannot order it December 28th and say, “Here’s my invoice. I paid for it December.” It has to be placed in service. And there’s very specific language in the internal revenue code on what placed in service means. It means it’s delivered, installed and in a ready condition.

Ryan Isaac:
Delivered, installed, in a ready condition. Okay.

Morgan Hamon:
It doesn’t mean you have to have used it.

Ryan Isaac:
Okay.

Morgan Hamon:
But it has-

Ryan Isaac:
Oh, yeah. Ready condition. Okay.

Morgan Hamon:
It has to be in the office.

Ryan Isaac:
Yeah.

Morgan Hamon:
It has to be delivered and installed. And by that, it is in a ready condition. But that’s the verbage. Not to geek out and go into accounting academia …

Ryan Isaac:
No, let’s geek out. I like it.

Morgan Hamon:
Where that came about is Coors Brewing Company years ago made a tremendous investment in … I can’t remember exactly what. Those tanks and stuff they buy are really expensive.

Ryan Isaac:
Yeah.

Morgan Hamon:
They made that big investment. It was delivered, installed, and so they wrote it off. But they didn’t … It was in a new section of the brewery, they hadn’t used it yet, and so IRS disallowed it. And Coors took them to court and won and said, “It doesn’t matter. We could have flipped the switch anytime we wanted.”

Ryan Isaac:
Because it was delivered, installed and in ready to use condition.

Morgan Hamon:
Is it delivered? And then it was ready. We could have used it tomorrow but we didn’t just because of economic factors.

Ryan Isaac:
Ah.

Morgan Hamon:
We had enough beer. We have to make those decisions based on good business.

Ryan Isaac:
Business. Yeah.

Morgan Hamon:
Right.

Ryan Isaac:
And I’ve heard dentists say that. Like, “I got to get this in here and get at last one patient-”

Morgan Hamon:
No. No.

Ryan Isaac:
“-in the chair and use it once on somebody.”

Morgan Hamon:
No.

Ryan Isaac:
Right. Okay.

Morgan Hamon:
But it has to be delivered.

Ryan Isaac:
Delivered, installed, ready condition.

Morgan Hamon:
DIR. Yeah. By December 31.

Ryan Isaac:
By December 31.

Morgan Hamon:
So, don’t wait until just before the holidays to order it.

Ryan Isaac:
Yeah. Okay.

Morgan Hamon:
You got to be making those decisions … Talk to your …

Ryan Isaac:
Like months.

Morgan Hamon:
… your vendor. But now. I would guess we’re sort of butting up against …

Ryan Isaac:
The time. The deadline.

Morgan Hamon:
… the time. And trust me, the equipment suppliers know this and our doctors have probably heard from them already.

Ryan Isaac:
Yeah, yeah. Yeah.

Morgan Hamon:
For that year end good deal.

Ryan Isaac:
Good. Okay. That’s good to know. That’s a huge topic. I want to go back to … And we could wrap up with this unless you had anything else … But one thing you were talking about earlier was cash holdings right now.

Morgan Hamon:
Yeah.

Ryan Isaac:
Cash positions in the business. What are you seeing? What’s your opinion?

Morgan Hamon:
First, let’s talk about just how to quantify that. It could be you just log in to Wells Fargo and just say, “That looks good.” But I prefer … I think every business owner, you’re going to have that intuitive comfort zone on how much money feels okay in there. But I think it’s helpful to validate that with some data.

Ryan Isaac:
Yes.

Morgan Hamon:
And so, this is how we quantify operating cash reserve is under normal circumstances, non-pandemic, it’s my recommendation that every business owner have at least one month worth of what we call break even expenses on hand. There’s different thoughts on break even. There’s different ways to calculate break even. This is how I calculate it and my firm calculates it is it’s your total average operating expenses plus debt service.

Ryan Isaac:
Okay.

Morgan Hamon:
Let’s talk about that means. Operating expenses, that’s just paying the bills. Paying the employees, marketing, rent, supplies, insurance; you name it. It’s just your operating expenses.

Ryan Isaac:
Doctor’s pay?

Morgan Hamon:
No. Well, associate doctor.

Ryan Isaac:
Associate doctor. Okay.

Morgan Hamon:
Yeah, if they’re work … This is your operating expenses before any money comes home to the doctor.

Ryan Isaac:
Okay.

Morgan Hamon:
Okay? That’s operating expenses. By debt service, what I mean is when you have a note on the practice, which most people do, some type of note, interest expense is certainly factored in to the operating expenses. And when that check is written to the bank, a large portion of that check goes to principle and a small … and another portion goes to interest. And it just depends on where you are in the amortization schedule and how much which is which, but it changes every month. And that’s one of the benefits of having books that are kept up to date every month is we know what those numbers are. The portion of that check written to the bank that covers principle deduction is nondeductible. You’re never going to find that on your profit and loss if you look up total operating expense. That’s just a repayment of amounts borrowed, nondeductible. That’s accounted for over on the balance sheet.

Morgan Hamon:
When we calculate the break even point, we will take that dollar amount applied to principle and we’ll add that to the operating expenses so we know the true one month cash requirement.

Ryan Isaac:
Costs. Okay.

Morgan Hamon:
The cash-out, right? You want at least one month of that and the reason for that is just for some peace of mind. You can just pay bills. Rent comes out the same week as payroll, the same week as the shine bill, just pay it. You don’t have to juggle money. That’s the primary reason of our one to one recommendation.

Ryan Isaac:
Okay.

Morgan Hamon:
One month of break even. That’s normal circumstances.

Ryan Isaac:
That’s normal.

Morgan Hamon:
Now …

Ryan Isaac:
What’s 2020?

Morgan Hamon:
Pandemic. Okay. We’re seeing two to three times break even.

Ryan Isaac:
Yep.

Morgan Hamon:
Is what most of our clients are maintaining. And I would say that’s normal. And if I had to peg a client average right now, it would be two.

Ryan Isaac:
Yeah.

Morgan Hamon:
Okay? One, if I ever call, schedule with a client, I see its one time, trust me we’re going to be talking about that.

Ryan Isaac:
Especially right now.

Morgan Hamon:
Let’s maybe think about plussing that up. And to improve a cash reserve, unfortunately there’s only one way to really do that and that’s just to be pretty judicious with the distributions and, of course-

Ryan Isaac:
Don’t spend it, don’t save it, don’t invest it.

Morgan Hamon:
Yeah.

Ryan Isaac:
Pile it up.

Morgan Hamon:
Not miss out on profit … Just make sure we’re maximizing our practice revenue as well. But I would say two to three times your monthly operating cost, including debt services, would be a safe place to be right now.

Ryan Isaac:
Awesome. Yeah. We’ve been talking about this lately in our Facebook group and on a couple Facebook Lives and what we’re seeing as well; that two to three month mark.

Morgan Hamon:
Yeah.

Ryan Isaac:
And I think it’s totally, like you said, very rational. Bigger tax bills coming up maybe. There’s still some unknowns and so I think it’s healthy.

Morgan Hamon:
Yeah. Absolutely. I think it’s where everybody wants to be. And we’ll see what happens when we rock into next year. Recently in the news, some developments on some therapeutics and a vaccine from Pfizer. If we have that money built up and then it becomes less necessary next year, next Spring, which I’m certainly hoping for, well then guess what?

Ryan Isaac:
Yeah. Use it.

Morgan Hamon:
It’s your cash. Yeah.

Ryan Isaac:
Yeah. I love that. Is there any parting words of advice? End of year advice? Anything you’d like to remind people of or let people-

Morgan Hamon:
I would, as your friendly CPA … This gets a little out of my-

Ryan Isaac:
Friendly neighborhood CPA.

Morgan Hamon:
Some of this gets a little out of my lane into practice management but-

Ryan Isaac:
Okay. We’ve seen it.

Morgan Hamon:
Tracking … Maximizing profitability is always important. There’s never a time that’s not important. But it’s really important right now. You do not want any money slipping through the cracks. Everybody, I think, has been very cognizant of their expenses throughout this whole pandemic. I don’t think anybody is just throwing money out the door that’s unnecessary.

Ryan Isaac:
Yep.

Morgan Hamon:
When everyone shut down, everyone took a real … It was an opportunity to take a real close look at your business and maybe examine some of that. I have a lower level of concern for our clients not managing expenses. I think they’re-

Ryan Isaac:
Being wasteful or something.

Morgan Hamon:
-watching that very, very, very closely. Profitability is impacted by a couple things. Certainly, expense levels is one. But the other thing it’s impacted by is how effectively a practice collects money. If you think about it, if you book production, you’re also paying for that production. You’re paying the staff, paying the owner, paying supplies, maybe a lab bill in there. You’re paying for that. If the collection process is not working very well at the practice and that production does not turn into that collection, that will destroy a profit margin faster than just about anything. And that’s just money slipping through the cracks. There’s never a time this is not important.

Ryan Isaac:
Yep.

Morgan Hamon:
But it is super important now.

Ryan Isaac:
Especially now. Yep.

Morgan Hamon:
Watch your accounts receivable aging. Make sure that’s not growing. Make sure money’s not slipping through the cracks because it’s not being collected. I think that’s the number one operational task for practice owners right now is make sure that collection process is super tight and that will help maintain the … With our clients, we want to see the highest profit margin that the practice can reasonably attain.

Ryan Isaac:
Right.

Morgan Hamon:
We don’t want to fall short of that. And so, watching that collection process, maintaining that, is, I think, the most important administrative task a doctor has as a practice owner. I would just encourage …

Ryan Isaac:
Cool.

Morgan Hamon:
… everybody to … Don’t lose sight of that.

Ryan Isaac:
And doing that well is a factor of a lot of systems and processes among team and doctors. And it’s always good to have someone come into the office and help work on that. Your firm doesn’t do practice consulting, we don’t do, but the benefit of working with a dental-specific CPA or financial advisor or attorney, whatever it is, even if they don’t do those other jobs they’re really familiar with it because they only work with that profession.

Morgan Hamon:
Right. Right.

Ryan Isaac:
So, you know people, you know red flags and you go, “Hey, I don’t do this but I know someone who does and you should talk to them.”

Morgan Hamon:
Yes. I can diagnose but I can’t always operate.

Ryan Isaac:
That’s fair.

Morgan Hamon:
I don’t know.

Ryan Isaac:
This doesn’t look right. I’m not going to cut that open.

Morgan Hamon:
Right.

Ryan Isaac:
But that doesn’t look right.

Morgan Hamon:
Yeah, we’re like the radiologist. I can look at the …

Ryan Isaac:
I like that.

Morgan Hamon:
I can tell you what’s wrong.

Ryan Isaac:
The radiologist.

Morgan Hamon:
But I can’t go in and say, “Here’s how you file your [inaudible 00:36:19] or your claim.”

Ryan Isaac:
And try to fix it.

Morgan Hamon:
I don’t know. But I can … That’s one reason why we ask our clients to send us accounts receivable aging report at the end of every month. It has nothing to do with their books or their taxes. I just want to have an idea if the practice is collecting money or not.

Ryan Isaac:
I love that.

Morgan Hamon:
Because if the profit margin’s lower than where it could be given their level of revenue, as their CPA I want an answer for them.

Ryan Isaac:
Yeah.

Morgan Hamon:
And I think more often than not, if a profit margin’s underperforming, I think it’s a collection issue versus an overspending issue; just my opinion.

Ryan Isaac:
So cool. That’s such a good point. Thanks for bringing that up. Where can people find HDA Accounting, reach out, get in touch, ask questions, schedule a [inaudible 00:37:02][crosstalk 00:37:02]?

Morgan Hamon:
HDAGroupDental.com is the website. You can call us. 303-799-0476. Or reach out to me, Morgan@HDAGroupDental.com. Always happy to visit with doctors.

Ryan Isaac:
Very cool, man. We’re proud to call you guys partners and friends and thanks for all the work you’ve done for dentists in the community this year. It’s been crazy. But thanks for taking time and being here. Thanks for your service in military and flying those cool planes that make me jealous of you.

Morgan Hamon:
Yeah. Awesome. Thanks for having me. Always a pleasure. Yeah, I really enjoy being strategic partners with you guys and I enjoy the relationship a lot. Yeah. Thanks for having me.

Ryan Isaac:
Absolutely. Any time. Thanks for listening. Thanks for joining us, everybody, and we’ll catch you on the next one. Carry on.

 

 

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