How Do I Get a Podcast?
A Podcast is a like a radio/TV show but can be accessed via the internet any time you want. There are two ways to can get the Dentist Money Show.
- Watch/listen to it on our website via a web browser (Safari or Chrome) on your mobile device by visiting our podcast page.
Download it automatically to your phone or tablet each week using one of the following apps.
- For iPhones or iPads, use the Apple Podcasts app. You can get this app via the App Store (it comes pre-installed on newer devices). Once installed just search for "Dentist Money" and then click the "subscribe" button.
- For Android phones and tablets, we suggest using the Stitcher app. You can get this app by visiting the Google Play Store. Once installed, search for "Dentist Money" and then click the plus icon (+) to add it to your favorites list.
If you need any help, feel free to contact us for support.
Does the new tax law mean you need a new tax strategy?
On this episode of the Dentist Money™ Show, Reese interviews Morgan Hamon, partner with HDA Accounting Group, a dental-specific CPA firm. A new tax law was passed in 2018. Do you know how it affects your tax liability or your practice?
The new tax code did sweeten some things for you, and Reese and Morgan discuss entity structures and other ways you can chip away at your tax liability under the new law.
Reese Harper: Hey, Dentist Money Show listeners, Reese Harper here. Today’s conversation is with Morgan Hamon. Morgan has been on the show before, but I wanted to bring him on again to talk specifically about a couple of big tax questions that have been plaguing people for the last few months. One of the messages with the C corporation as a business operations entity and whether that makes sense for the average dentist. The other one has to do with how to maximize all of your deductions to make sure that you’re paying the lowest effective tax rate possible each year. I think that both of these topics you’ll find very interesting and very helpful as you develop your tax strategy moving forward. Thanks again for tuning in. I hope you enjoy the episode as much as I did.
Speaker: Consultant advisor or 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 or registered investment advisor. This is dentist money. Now here’s your host, Reese Harper.
Reese Harper: Welcome to the Dentist Money Show where we help dentists make smart financial decisions. I’m your host, Reese Harper. Excited to have a guest back on the show. One of my favorite tax people, Morgan Hamon. How are you doing, Morgan?
Morgan Hamon: Doing great, Reese. Thank you.
Reese Harper: What’s the weather like up there in the great state of Colorado? The home of my Broncos.
Morgan Hamon: It’s not awesome. Just like the Broncos.
Reese Harper: You were get to fly a plane down to do an in studio interview today and weather it was an ill-advised trip for a Cessna.
Morgan Hamon: I have a Cirrus and-
Reese Harper: Oh, even better.
Morgan Hamon: … I got up this morning and check the weather and there’s a large convective SIGMET planted over the Rockies right in between.
Reese Harper: Like no one knows what that means.
Morgan Hamon: Oh, sorry. Convective activity, thunderstorms over the Rockies. So bad weather or massive pile of rocks is not where you want to be.
Reese Harper: Are you a Broncos fan? I’ve never asked you that.
Morgan Hamon: No. We love the Broncos, we’re Broncos household.
Reese Harper: Okay, dude. I am too. And I’ve been clear back since the helicopter dive where John Elway almost got killed and taking at … That’s when you really saw he wanted it in that play.
Morgan Hamon: That was cool. Then Manning, when he’s 2012 to 2015 was a fun time to be in there.
Reese Harper: That was a great time. It’s been a little rough since 2015.
Morgan Hamon: Kind of a little dicey.
Reese Harper: I get my hopes up every year and it’ll happen though, right? It’ll happen. I mean it’s not Boston, it’s the Red Sox, so I feel like we’ve got some hope. Anyway, for those of you who don’t know, Morgan did spend a lot of time in the military as a pilot. He occasionally just flies in to do the podcast live but we’re glad he’s safe and sound today. We’ve been talking and planning this podcast around a couple of key topics that have been probably the most requested tax questions that I’ve gotten in the last few months. Maybe this year actually. Morgan and I share a few mutual clients as well and we’ve had the chance to kind of evaluate some of these questions with each of them.
Reese Harper: So the first one Morgan, that we want to dive into is after the tax law changes happened there are several practices adopted putting together a C-corp management company to essentially try to reduce their overall tax rate instead of being of a standard pass through entity and getting the normal small business deduction, which will have you to kind of touch on and then paying income at a higher rate. The argument was, look, if you can move a lot of the activity into a management company and justify that. And essentially wipe out all of the income in there if possible, so that we don’t have to pull the money out, because if you pull the money out of this C corporation we get taxed again.
Reese Harper: Then maybe this is a good thing. I just through a lot at people so we probably should back up and make sure we go step by step on these two different options. But we want to kind of talk through why it might be a good idea and why some people might choose to do it and then why for the majority of people it actually in my experience at least is not good for the average dentist. It could make sense for some cases where you might be a very large practice with significant seven figure income. I’ve got some opinions on it. I know you have, let’s start by just posing the question. Why would someone even do this in the first place? What’s the difference between the two?
Morgan Hamon: I think there’d be helpful to maybe just talk about how these entities came into being. Because most successful single doctor dental practices are taxed under subchapter S. It kind of where that came from is back way before the income tax code rewrite the 1986 choices. If you were a solo doc going into practice you could be like a corporation or a sole proprietor. Sole proprietor, you just pay tax at your ordinary tax rate and then you’ve got to pay yourself employment payroll taxes. You didn’t have liability protection with the C corporation itself as a tax paying entity. Of course as very strong liability protections.
Morgan Hamon: Why the C-Corp is rarely the entity of choice for a small business is that it does have double taxation. In other words, the corporate tax is paid by the C-Corp and then when the shareholders wish to take money from that entity, they can either take salary, which is obviously taxed at full ordinary income tax rates. Or dividends, which are taxed at the favorable capital gains. But the money gets taxed again as it comes out. So I don’t know too many people that want to have their company pay income tax and then when they take money out they pay tax again on that same money. It’s bad.
Morgan Hamon: So that’s where the sub chapter S came from. It was intended along with the advent of the LLC and PLLC entities in the states was to give small business owners an element of having some liability protection. But then also avoiding corporate double taxation by having that liability protection coupled with pass through tax treatment. So you only pay tax one time at your marginal tax rates. That hasn’t changed with this new tax rewrite then recently. The big change is the corporate tax rate dropped to 21% and that’s where all this excitement comes from. Because pi-
Reese Harper: Because previously it was at what rate?
Morgan Hamon: Like 35 [crosstalk 00:07:42]
Reese Harper: Like just to recap, originally you could have been a C corporation paid, we’ll call it 35% corporate tax, right? On all of your profit or your net income. Then on top of that, you’d pay regular ordinary income tax on any salary that you paid yourself, correct?
Morgan Hamon: Well, keep in mind if you take salary from a C-corp, that’s a deduction. So you’re not going to pay corporate income tax on any money that is deducted as salary but you pick up that salary as your W2 on your tax return.
Reese Harper: Tax return. So essentially there was no incentive at that point. I mean there was no incentive for someone to be a C corporation at historically back in the late eighties early nineties?
Morgan Hamon: Well, historically it’s not only a lack of incentive, there’s a major disincentive. Because the more you take in W2 salary, the more payroll tax expense you incur. And to [inaudible 00:08:56] for an S-corp for example, to effectively utilize that S-Corp, you take a reasonable salary for services performed, pay your payroll taxes on your owner salary and then you take the remainder of the profit home via draw. Which is not subject to self-employment payroll taxes. For most of our … like our average client, that structure and strategy right there saves about 10 grand a year, puts in the doc pocket every single year.
Morgan Hamon: So the thought of taking all those draws, and also like a draw dividend distribution, those are all synonymous. We’re all talking about the same thing. You’d taken the residual profit home, having to pay tax again on those withdrawals. It’s not, I mean, I’m certainly not would never do that to myself and I’m not going to do it to our doctors.
Reese Harper: So what changed?
Morgan Hamon: What changes the tax rate went down to 21% and so you have people considering their effective federal tax rate. Which for a lot of our doctors making three, four, 500,000. Their federal effective is going to be high twenties maybe 30 low thirties. So if the thought is why could go from 30 down to 21 that would be a big savings. But there’s a huge problem with that. If you flow all this money up to the C-corp, and the C-corp pays 21% tax. Great. So the C-corp pays its own tax. Now we have what’s left over still in that C-corp eventually, we’re going to want to take that money home. We can’t just sit there and you have two options to take it home. You can take it home via a W2 salary from the C-corp, which means that 21% doesn’t exist.
Morgan Hamon: That you’re going to deduct that salary and then pick up that income at your personal tax rate. Or you can take a draw. So after the corporation has paid 21% tax, you’re going to pay another 20% when you take that home. Add those together, you’ve got 41%. I’ve heard this and I know you have to that the trouble just how to get that money out of the C-corp and I’ve heard some ideas that just the sound creative but they don’t really pan out. One idea, and I heard this from a prospect I was visiting with on an initial consultation, somebody had set him up put for the C-corp and their way to get the money home was they were going to just have the C-corp, quote-unquote, loan money to the doctor and then in five years just close the corporation and forget the loans. Couple of big is that.
Reese Harper: Oh, man. Well that’s pretty aggressive.
Morgan Hamon: Its not aggressive, it’s tax fraud. Even if you followed through and you could come up with some business purpose that you’re profitable. C-corp needs to loan the owner money. Even if you close it at the end of whatever, however long you want to go. And he was planning on five years debt forgiveness is taxable income. So you’re just delaying and still going to pay the double tax. That doesn’t pan out. Then recently, and I think you and I both saw this, it was an idea to have a management company and flow the money to the C-corp and then pay the debt service out of the C-corp.
Morgan Hamon: So that in the thought that narrowing, well you’re taking that money home, you’re going to pay the nondeductible debt service. But you’re taking the problem with moving, you cannot move equipment and loans from your clinical entity to a management company. You’d be in default of your loan. Those, the assets are when the practice was made are in that entity and they’re secured that’s collateral for the loan. So the business deduction for the interest expense is from the clinical entity. You can’t just move that to the C-corp. If you run into the same problem, let’s flow money up to the C-corp, pay the 21% but then how do you get it home?
Reese Harper: So what you’re saying is one of the challenges, you can’t really … existing debt is difficult to move. I mean it could be moved, but you’d have to go through refinancing and a whole purchase transaction right between the entities, which would then … Keep in mind too for those of you who may … this is a pretty critical distinction. When you’re in a flow through entity like an S-corp or an LLC, you’re able to take losses or losses can help offset your income in a very different way than would happen in the C corporation. Isn’t that correct, Morgan?
Morgan Hamon: Yes.
Reese Harper: One of the disadvantages of operating a C corporation is anytime there are big deductions or equipment purchases or losses that you would normally be able to depreciate and have them flow through to you. They stay on the books of the C corporation for a longer period of time. You don’t get to realize the benefit of those losses for years. Correct me if I’m wrong and maybe clarify that if it needs to.
Morgan Hamon: That’s exactly correct. The key point to really reinforce here is the C-corp it’s a tax paying entity. If you remember back as I think the election of 2012, Mitt Romney famously said, C corporations are people too. He was right, right? If you do you remember that, I can remember that. But that’s because C-corp did they pay their tax? You’re right. So if there’s losses, that’s all with the C-corp. Where whereas if you have, if you’re a sole proprietor have an S-corp for partnership, those losses flow through and you pay tax, just your personal rate one time.
Morgan Hamon: So we’re professional service providers. I mean, this is our world. You and me are doctors, attorneys and we really … There’s some real limitations on us particularly if we’re going to talk about this tax code. One thing that doesn’t … it was talked about big time and you and I may have talked about this on the last podcast, but when that tax law was rewritten 2018 there was that pass through deduction if you recall. Whereas to have some parody where … Because the corporate C-corp’s, they got a tax break down to 21% and so then to make it fair for all our small business owners. It was put into the code section 199 A, that you could deduct 20% of your pass through income to make it kind of equitable treatment. But then the Congress added in the professional service providers are excluded if you make more than 315,000, which is most of our clients. There’s lots of handcuffs on professional service providers.
Reese Harper: Well and what I was going with my comment there on the C-corp side was that I … I appreciate you sharing that because I think that’s a really critical component that we can touch on later as well. But because the C-corp doesn’t allow me to capture losses for me personally, like immediately, like I don’t get to recognize those losses as quickly. Losses are a real benefit, right? When I buy a piece of equipment and I get to wipe out my income mostly for a year, if that gets stuck in my C corporation, and I have to wait to recapture that until I sell my business or have some profits that are taxed at the same way. I’m delaying the tax deduction that I could have claimed for a long time.
Reese Harper: For me personally, even though there were a lot of advantages to looking at a C corporation for me. The disadvantages of the fact that losses would continue to just pile up and I wouldn’t be able to capture them. Man, I’m able to use those losses to hire more people and expand my business and buy more equipment and add a new location and bring on a new associate. Those losses are just as good as cash to me. I feel sometimes people will adopt a complex entity structure like a C corporation. Not realizing that there are some downsides to it. Two of the big ones being your losses are not as realizable. And second, if you want money out of this thing to live on and enjoy, you’re going to be paying more tax than you would have paid had you just kept like stayed in as a pass through entity.
Reese Harper: Because you can’t write off everything inside of that C corporation. You can’t expense everything. I mean I’ve never heard of one situation yet where … The only situations I’ve heard of, you brought one up right now, which is you’re going to loan money out to the owner from the C corporation. That’s how you can get money out of the C-corp and that’s tax fraud. I don’t know, I just like to ask myself what is the congressional intent of the law so that I don’t get caught on the wrong side of this and outlined it anyway.
Morgan Hamon: [inaudible 00:19:09] Reese that leads right into business purpose. [inaudible 00:19:15] to have, like with the management company. There needs to be some business purpose for that. So if you just have one practice. What is the purpose of the management company? If you’ve got a handful, you’ve got numerous practices. There’s some business purpose. Maybe we want to centralize phones and insurance and billing. There’s a purpose to have that company.
Morgan Hamon: But if one [inaudible 00:19:41] you need a separate company to manage a practice. That is where in my opinion for a doctor that has one practice or maybe even two to maybe three the management company, if we just kind of forget the tax and just talk about this extra layer. In my opinion it adds complexity and cost that I think until the business scales to where it’s really, you talk to like a 10, 15 practice kind of DSO then a management company probably makes a lot of sense. But when you have just one practice, one or two. I think in my opinion the cost outweighs the benefit a lot of times.
Reese Harper: I think we can kind of summarize this segment by saying, look, if you’ve got a very high net income and really ambitious growth plan of either a starting a … if three or more locations is just the starting point. If that’s beginning and you envision a seven figure net income and you do need to centralize operations and you do need to have an infrastructure to support multiple partners and multiple locations in your building towards a DSO. I do think it’s a different conversation …
Morgan Hamon: If you think about why we own businesses? Why do we do this? It’s a lot of work, it’s a lot of sweat equity for our dental clients, it’s a lot of risk. You go take out that big loan you, it takes you years to build this practice up to where you have comfortable income. There has to be a reward for undertaking that journey and in my opinion and what I try and work with our doctors on is to realize that reward through an acceptable profit margin. A high robust profit margin 45%, 50% margin. So that we have very healthy income. I don’t know about you Reese, but you work hard, you build that up to have these financial rewards to provide for yourself and your family and your goal, is you want to take that money home.
Morgan Hamon: Having it in a C-corp just makes no sense and it hasn’t made sense for 30 years. It’s just now the tax rate dropped from 35 to 21 and everyone’s eyes get big because they say, “Oh my gosh, it’s so much less there has to be a way.” But what you run up against is that that double corporate taxation. That hasn’t changed. That hasn’t changed at all. Going down looking at the C-corps that there’s just not a way or around that double taxation for our client base, a professional service provider, doctor owners.
Reese Harper: Well let’s go on to the second biggest question of the day. It comes in this form usually. So you present your client with the final tax bill and it’s a little more than what they were anticipating. Maybe for your most of your clients it’s right what you budgeted. But I’m going to make the assumption that most of our audience is not working. Maybe with a CPA that’s quite as dialed in and so they’re usually presented with attacks maybe bill that was a little larger or an extra check they have to write.
Reese Harper: Then you’re kind of faced asking the question, am I just stupid? Am I dumb? Because, I feel I’m the person … This is what people are thinking. Usually it’s like I’m paying so much in tax and I have all these other people that I hear about and all my other friends that don’t pay as much as me. They seem not to or they’re set up in a different way or their CPA’s more aggressive or there’s all these reasons and it’s hard. Because you don’t really know why you’re paying what you’re paying or if it’s fair.
Reese Harper: It just, everything feels unfair about when you thought that when you made all this extra money, you’d have all this extra money left over. But by the time you pay your taxes, you’re just kind of, men, I mean I barely got ahead. That’s how you feel. I think everyone always is wondering, I don’t think my CPA’s got all my deductions where he’s missing something or we’re not catching everything or it’s not enough. I just want to talk through that because it’s a really common feeling and I think it’s hard for people to feel like they’re ever really being dealt with fairly.
Morgan Hamon: Right. It is certainly an important topic. For tax planning it … and we do try we work on it quarterly. We serve an industry where it is difficult, whether we’re helping you or somebody else’s. Because we have an industry where revenue changes every month. I mean, and not uncommon to see a 30%, 40% swaying month to month. So the revenue moves month to month. It’s also very equipment intense industry. Whereas we could plan all year and then we finally decided to pull the trigger on a Serac machine in December and now the entire tax situation can change all of a sudden.
Morgan Hamon: So it is a challenge to do the tax planning year-round, for doctors that own dental practices. That being said, I think of tax planning … let’s just back up a little taxes. There’s no way around it. Your tax is almost like a condition, it’s like having cancer. There’s no cure, you just have to manage it your whole life. The way I look at a quarterly tax plan that we do it for our clients, it’s really a treatment plan. We’re going to lay out a treatment plan on how we’re going to manage these taxes.
Morgan Hamon: The couple of key things, it is a team effort because the way you manage taxes, there’s no secret loophole out there. The internal revenue code, it’s title [inaudible 00:26:29] the United States code. It is the most probably researched code out there. So there’s no secrets in it. The way you manage tax as you lay or multiple strategies on top of one another to convert as many expenses into business deductions as possible. You do that through a series of implementing tax strategies and it requires effort on both the adviser and the doctor.
Morgan Hamon: So I can walk you through a few things, kind of big ticket items you want to make sure we’re doing so that we can have some more confidence that we’re not missing out on things. First of the entity structure and tax classification. If you have net profit over 200 grand and you’re single doctor owner-operator practice, you need to be an S corporation and you need to take a reasonable salary and manage that hidden level attacks that self-employment payroll tax. We save on average our clients 10, 11 grand every year doing that properly.
Morgan Hamon: Home office deduction is just made for doctors, which unlocks the vehicle to take either mileage reimbursement or purchasing or leasing a vehicle through the practice. Perfectly acceptable. We do that all the time, I do that for myself. You can pay your kids whether they’re little kids doing modeling or teenagers like mine doing tasks for me. You can pay each child up to 12,000 a year shift income to a lower tax bracket in the same household. If you’re going to have a team building event or holiday function and rather than going to a hotel ballroom or restaurant, rent your house out, pay yourself full market rent. You can do that up to 14 times a year. Pick up the deduction in the practice and not pay tax on that personally.
Morgan Hamon: Every practice owners required alpha board meeting, nothing says that has to be in your home town. Pick where you want to go. Four or five day trip. We have a kit for that where we give us kind of a sample board meeting minutes. The first thing it does is name the spouse as an officer of the entity. So all their costs are tax deductible to. These are things that can be done you check off these items and we’re just not leaving money on the table. We have to chip away at this tax liability because for our clients reach you and I live in the same world with the same clients. These doctors are making four, five, 600,000 per year and we just have to chip away at this through a number of strategies and for an effect-
Reese Harper: So let’s just back up just a little bit since we’ve talked about the right entity structure. We talked about having the salary set properly. The setting your salary properly is a pretty meaningful opportunity. The third thing you listed was home office. How does that typically get implemented?
Morgan Hamon: So the home office it’s very straightforward and I have yet to meet a dentist that didn’t do some work home. It’s predicated on you actually have an office space at home. It doesn’t have to be an entire room, but she needed a desk, a place to work. What we do is we ask for some information about the monthly cost of the house and we assign an annual value for the cost of maintaining a home office and the practice reimburses the doctor for the cost of that home office. Then we have a formal letter to establish that where the entity directs the owner to have that home office. There’s a number of reasons we can justify this.
Morgan Hamon: This has been through tax court a number of times. The taxpayer is one every time. It’s not an audit risk. It’s not even a gray area, it’s just something everyone talks to. But this is the key reason I want to mention this. You have to have the home office formally established to unlock the auto deduction. If you want to go get the Cadillac Escalade that’d be the company car. You have to have a home office because if you don’t driving from home to the practice, that’s commuting, which is expressly prohibited from being deducted. But if you’re driving from home office to clinical office, that’s now business miles. That’s what unlocks the vehicle deduction. So you have to have both.
Reese Harper: So after that you mentioned what after home office deduction.
Morgan Hamon: They in the kids.
Reese Harper: So how does that change? I mean, before the standard exemption for paying children or not paying children, but the standard exemption for income tax was a lot lower than it is now. It went from like 6,500 or something to 12,000, right?
Morgan Hamon: Exactly. So now it’s much higher so you can pay each kid up to 12,000 and if you do that, it has to be through the payroll on the practice. She can’t pay him as a contractor because if you pay anybody more than the 600 bucks. You don’t want to file a tax return for your kid. So up to 12,000 through payroll, it shifts income to a lower tax bracket in the same household. Then you can use those proceeds, put it in a Coverdell or a Roth IRA for college savings.
Reese Harper: Ultimately we will pick up some payroll tax for that event, but it’ll be much lower than the ordinary income tax we would pay personally if we just let that fall through.
Morgan Hamon: Yes. So if you figure maybe you’ve got like a 29% or 30% effective federal, to your higher honor and you’ve got another 5% state like Colorado. So you’re 35% effective. You’re going to pick up a 15% payroll tax, but the net savings is 20% on that money paid to kids. It’s just worth the doing.
Reese Harper: The other thing you said was you started going down the travel kind of expense and I think this is a big list of items travel. What we’re talking about here, the one that I see it happens quite regularly is people actually don’t take the time to clearly go through their books at the end of the year and accurately take, I wouldn’t say an overly aggressive position, but even take a position that would be favorable to you as a business owner. There are a lot of expenses. I just went through my entire … I had to do a late filing this year to get a lot of our K-1 issued and because we went through a fundraising event.
Reese Harper: I’m looking through my P&L and the business just to make sure … I mean we’ve got thousands of transactions. I wanted to make sure that I didn’t miss anything. Because even though we’re doing our bookkeeping month to month and I’m trying to make sure I’m accurately keeping tabs of all of my travel expenses properly, my subscriptions expenses properly, my meals and entertainment, my marketing expenses and my promotion. Some things that were coded as distributions probably could have been business expenses and many were.
Reese Harper: It wasn’t like an aggressive position to take. It was just my bookkeeper actually thought one of the items was a personal expense in reality, it wasn’t. It sounded personal, but it really was business. Even though they came back and probably tried to clarify it with me in the middle of the year and send me an email and asked me what these expenses were. Sometimes things just get coded wrong, right?
Morgan Hamon: You’re busy so, this is how we address that. We ask our doctors to have a segregation between their business life and their personal life. Have your two cards in your wallet. Anything business, even if it’s well I think it’s business, put it on just on the business card. All right. When we do the books we obviously going to pull in all those transactions from that business card. The way we train our staff is if the doctor put it on their business card, it’s business. So we don’t inject ourselves in trying to decide what’s business and what’s personal. The doctor knows best, if they pull out the business card, it’s business. We don’t know. You say, “Okay well that’s JC Penny’s, it must be personal.” No it’s not.
Reese Harper: That’s their call.
Morgan Hamon: Maybe they set a plates or something for the break room, it’s not up to us. As a CPA, it’s my job and my duty to help our clients avoid paying as much tax as I can. That’s perfectly legal. It’s my job, it’s responsibility. There’s a line there where avoid or evade, you can’t cross the boundary there but we can certainly avoid as much as we can within the code. We want just like you said, we want to capture as many deductions that we could substantiate business as we can. I mean that’s our duty. But we scrub it. I mean, we’re going to scrub that for the return goes out. Because, if we end up sitting at across the table from a revenue agent it’s not just the doctor that has to explain what happened. It’s us too.
Reese Harper: Booking a free consultation is super easy. So why haven’t you done it yet? Just call 833 DDS plan or go to dentistadvisors.com and click book a free consultation. You can find a time on your calendar that works best for you. So why hesitate? We can help you take control of your financial future and find out how by going to dentistadvisors.com today.
Morgan Hamon: Here’s the thing with audits, because this is another topic people concerned about. It’s very rare. It’s been I think three years since we had a last full audit and we service about 400 practices. Coast to coast audits are rare. Most of them if there are questions that’s a correspondence audit where they’ll just send a letter and they want some clarification on something. If it is a full blown audit though, what they’re looking for, they’re going to start with the low hanging fruit. So they’ll say, give us your collections report out at Dentrix and I’ll pull your bank statements and they’ll go trace the cash. If people are thinking, well I’ll just take the cash payments home and not put it in the bank, [inaudible 00:37:54] they know that’s the first thing-
Reese Harper: They want to find if you’re hiding income, first of all.
Morgan Hamon: The next thing they’re going to do, they’re going to go look at your meals. There’s no entertainment deduction anymore. They’re going to look at the meals and if you’re having breakfast, lunch, and dinner on the practice seven days a week, you can expect that they’re going to … if you think about it, what’s the purpose of that IRS audit from the revenue agent’s perspective? They’re generating revenue. So if they see that the easy stuff’s being abused, it’s going to be probably a more painful audit. But I agree with you 100% Reese, there’s big money to be saved by just putting a little bit of effort into it. Taking those board meetings. Do the company event at home, right yourself and you can pay yourself four seasons type rent if it’s in your area. That there are ways you can be aggressive like that and trim that tax bill.
Reese Harper: We haven’t even talked about the my big one, which I’ve talked about in previous episodes so we won’t dive into, but I mean, there is an increasingly large amount of money you can put away for retirement that most people just don’t do and they pay unnecessary income tax that they could have deferred for decades and had substantially larger deductions than what they’re taking. If they just would have instead of paying off a piece of equipment, they took up that same money that would have been taxable. Instead of paying 50 grand towards a piece of equipment, they could have just deducted that and saved them 20,000 plus dollars in tax that year and the type of retirement plan you can structure gets bigger as your income grows as well.
Reese Harper: We’re not talking about anything overly creative like a life insurance policy through a C-corp here, we’re just talking about a standard profit sharing plan or standard pension plan that has plenty of case law to support it and it’s like a plain vanilla kind of deduction. I just don’t feel people take advantage of those often enough. They don’t max out their HSA, even though it’s sitting there. They don’t compensate their kids even though their kids are doing things for them. In many cases, their spouses aren’t being compensated even though their spouses are doing things for them, their spouses vehicles being used for business and not being deducted.
Reese Harper: There’s all these like things that just don’t get the low hanging fruit never gets captured. I would encourage you to communicate … Anyone listening, communicate a little bit more with your CPA, engage a little bit more, have more conversation. They’re all busy, they’re all buried and it really is. You’re going to get more value out of your service providers if you’re willing to reach out and be proactive. Don’t hesitate to do it. They want to hear from you and they want to service you and they’re excited to provide you the best standard of care they can. If you’re feeling like that doesn’t describe your service provider, then maybe it’s time to start looking. Morgan, I’ll let everyone go with the last word today.
Morgan Hamon: Nah, it’s been a great discussion. Ever since that tax law was put into place, I mean, a lot of discussions on what can be done to maximize that tax savings, which we certainly have an interest in. I think the C-corp for the average dental practice owner that’s doing well. I’m not convinced it’s a viable way to go. But there’s all kinds of very effective proven tax strategies. We’ve got to layer those on top of one another, but that the tax bill can be managed. It absolutely can be managed. I think the S corporation managed effectively is the biggest bang for the buck for most of our clients. In that kind of high three, four five 600,000 and up income bracket. I really enjoyed it. We’ve covered a lot of good stuff.
Reese Harper: A lot of ground. Thanks so much, man. I really appreciate all you’re doing and thanks so much shooting for Dennis all over and look forward to having you get on the show soon.
Morgan Hamon: All right, thanks for your time. I enjoyed it.
Reese Harper: Have a good [crosstalk 00:42:36] right.
Morgan Hamon: All right. Bye, bye.