What’s Your Real Income? Here’s Why Most Dentists Get It Wrong. – Episode 276

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Taxable income and gross cash flow. What’s the difference and why is it important?

On this episode of the Dentist Money™ Show Ryan and Matt examine the difference between taxable income your CPA reports and the gross cash flow your CFP® needs to know.

Determining how much money stays in your pocket is key to saving effectively, paying down debt, or buying that boat you’ve dreamed about. For financial planning purposes, Ryan and Matt go over the formula for how much you actually make. To do any future planning, it’s important that you get the math right.

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Podcast Transcript

Ryan Isaac:
Hey everybody. Welcome back to another episode of the Dentist Money Show sponsored by Dentist Advisors, a no commission, comprehensive fiduciary financial advisor, just for dentists all over the country. Check us out. Dentistadvisors.com. Today on the show, me and Matt are helping you calculate and answer a very, very common and very important question that many dentists ask all the time and don’t really know how to figure this out on their own, and that is how much money did I even make last year for my business? Very important number to figure out as a dentist. What is my income? If you have any questions, go to dentistadvisors.com, click on the book free consultation link, or go to the Dentist Advisors discussion group, post a question, we’ll post an answer. Again, thanks for being here. Thanks for the support. Thanks for joining us. Enjoy the show.

Announcer:
Consult an 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, a registered investment advisor. This is Dentist Money. Now here’s your host, Ryan Isaac.

Ryan Isaac:
Welcome to the Dentist Money Show where we help dentists make smart financial decisions. I am Ryan Isaac and I’m here.

Matt Mulcock:
The host.

Ryan Isaac:
The host some call me, some call me sir, some call me host, some call me worse things than that. That’s okay. I’m here with Hollywood, the mountain, the Matt Mulcock. What’s up, Matt? How you doing buddy?

Matt Mulcock:
I’m good, Ryan. I’m not the anything, but thank you. I appreciate it. It’s good to be here as always.

Ryan Isaac:
Leaves you speechless, that intro sometimes.

Matt Mulcock:
It really did. I should be prepared for it, but it always leaves me a little speechless.

Ryan Isaac:
You’re like what? What just happened?

Matt Mulcock:
I was like, yeah, I don’t even know how to react. Yeah. Feeling good. I’ve realized this is like one of the highlights.

Ryan Isaac:
It is.

Matt Mulcock:
Top two highlights of my week.

Ryan Isaac:
It is man. It’s cool. It’s cool to talk to the people. They’re not here with us yet.

Matt Mulcock:
But they’re hearing us.

Ryan Isaac:
But the people listening to us, they’re here, we’re thinking about it, we know who’s going to be listening and first of all, I guess that’s a great shout out, man. Thanks everyone for being here.

Matt Mulcock:
Always.

Ryan Isaac:
Today’s a Friday for us. We’re feeling it. Feels good.

Matt Mulcock:
Feels good. Can I give a quick individual shout out that we did on Facebook, but this person, Jared, my man, I will go first name only.

Ryan Isaac:
Jared.

Matt Mulcock:
You know who you are, that t-shirt you made was incredible. And if you haven’t seen it, go to the Dentist Advisors Facebook group.

Ryan Isaac:
Check it out.

Matt Mulcock:
And join and check it out.

Ryan Isaac:
It’s amazing.

Matt Mulcock:
It is incredible.

Ryan Isaac:
It’s amazing. What he’s referring to is some episode, a few weeks ago, we were just trying to explain, look, we have a message and we’re very niche. We’re a premium financial advisor just for dentists, but we also know that we’re not for everybody and that’s okay.

Matt Mulcock:
Yeah, it’s okay.

Ryan Isaac:
We’re just here to teach and try to help. But for those of you listening who hear this message and you’re like, that’s my philosophy too. Yeah. I think that way. The invitation is to just get on the bus.

Matt Mulcock:
Get on the bus.

Ryan Isaac:
We’re driving a big yellow bus.

Matt Mulcock:
The door’s open.

Ryan Isaac:
Door is open. There’s a lot of stops.

Matt Mulcock:
Tons.

Ryan Isaac:
First of all, there’s tons of stops. We have seat belts on the seats, unlike your kids’ bus, our kids drive to school in.

Matt Mulcock:
Exactly.

Ryan Isaac:
Got seat belts.

Matt Mulcock:
We have TVs. It’s a premium bus.

Ryan Isaac:
It’s a premium bus, guys. This is like a touring bus. Rockstar basically. This is a rockstar bus. Get on the bus, join us. And that’s what the t-shirt was. It was Matt driving, me hanging out a window saying, “Get on the bus and join us.”

Matt Mulcock:
We look good. I look way better as a cartoon.

Ryan Isaac:
I do too.

Matt Mulcock:
Than I do in real life.

Ryan Isaac:
I look way cooler as a cartoon than in real by a long shot. Anyway, thanks for being here. Thanks for joining us. Today, we’re going to talk about a question that is just really, really common and it might seem simple, but it’s extremely crucial for doing the right kind of planning and getting the math right and projecting out a lot of things. Where you’re headed and what you should save and can you pay down debt right now? And your are your taxes too much? And can you afford more debt? Can you get the dream house? Can you buy the boat?

Matt Mulcock:
Can you buy the boat?

Ryan Isaac:
Can you buy the stupid boat, man?

Matt Mulcock:
It’s always the boat.

Ryan Isaac:
Just get the boat. That’s what we’re talking about today. And the question and this comes up all the time is what did I earn as a dentist? What’s my income?

Matt Mulcock:
Income.

Ryan Isaac:
Income. Income.

Matt Mulcock:
What is it?

Ryan Isaac:
Exactly. And it gets harder for a practice owner. We’re going to talk about that, all the nuances. But that’s the topic for today is what did I actually earn as a dentist last year? And why does it matter? Let’s start with the first question, what would you say to that if a dentist asking you, Matt, “Why does it matter to calculate my income? I kind of think I know, but why does it matter?” What would you say?

Matt Mulcock:
Yeah. It’s what we talk about all the time. The first step of being able to do any type of planning financially in any aspect of your life is getting organized and knowing the data. And probably top number one or two things you need to know is your income. And the reason being is because pretty much everything is based off of that. Like you said earlier, how much can I save? What retirement account should I set up? Should I be aggressive with debt versus investing? Pretty much, there’s other factors here, but a lot of it comes back to how much income do you have? How do you approach your student loans? Again, one of two or three factors always comes back to what’s your income?

Ryan Isaac:
Yeah. What are you making? There’s another one kind of, it’s the reverse of what’s my income? But it answers the question is my business okay? Or is it broken? Because once we know income and we can compare that to collections, there’s your profitability. And then depending on your situation, solo doc, partners, associates, multiple locations, whatever, we can start to get a picture for how efficient your income is. Are you an owner who’s going through all of the pain and the sacrifice of being an owner, but you’re earning an associate’s wage? Which is common. It happens.

Matt Mulcock:
If you really look at it, you’re making 28% of your collections and it’s on paper you think, or if you’re just guessing, oh, I make pretty good money, I think. I make 400 grand, whatever. Okay cool. But like you said, what’s your collections? And what does that profitability metric? Because if not, or if you’re below that associate wage, which would be about 30% of your collections, yeah. It’s a big waste of time.

Ryan Isaac:
And that’s not uncommon for a business owner, single doc, single location, business owner, earning an associate’s wage or worse. It’s not uncommon, unfortunately.

Matt Mulcock:
Oh definitely.

Ryan Isaac:
And that could be in a whole realm of the entire scope of all financial decision making, that could be the first, most highest urgent, most important place to begin is fixing that problem because if you go 25, 30 years in a career under earning, especially as a practice owner, it’s catastrophic to the options that you could have in your life.

Matt Mulcock:
Let’s say you are below that associate wage, we’ll say again, your profitability is 28% and you could be making 30 plus as an associate. One of two things needs to happen at that point. Either you need to take a hard look at what you’re doing in your business and figure out how you improve that or B, or number two.

Ryan Isaac:
Or B, two.

Matt Mulcock:
Or next option B2, would be, you got to figure out do I even want to do this as an owner? Maybe all this stress isn’t worth it and I need to figure out a different path. We’re not saying you should do that. Just saying, it’s going to open up a whole other.

Ryan Isaac:
It’s an option.

Matt Mulcock:
A whole other thing, a case of questions that you have to be asking yourself.

Ryan Isaac:
I don’t think there’s shame and I have found fairly often in my career, owners who would be better off as career associates with a solid practice. And I think now more than ever in dentistry, there’s really great employment opportunities because there’s just, people are building bigger businesses and even the big ones still feel small sometimes. They still feel really personal and private. I think that’s true. Yeah. And what’s crazy is you’ll meet somebody who’s under earning, they’re not running an efficient business. They don’t know that and they’re paying off student loans really fast. And you’re like, “Whoa, man, we need to take that student loan extra payment money and you need to go hire someone to fix your business and you need to add another a 100 grand to your income.” It’s detrimental.

Matt Mulcock:
Go do some marketing or do something.

Ryan Isaac:
It’s huge.

Matt Mulcock:
Get a consultant in there.

Ryan Isaac:
It’s huge. Income is just, it’s such an important indicator. And you brought something up, I think is really important to mention too, when we use the term comprehensive financial planning, which is how we describe ourselves, we’re a comprehensive financial planner means we do all of the stuff. We’re not just setting up an account or selling insurance which we don’t do that. But comprehensive is all this stuff in one of the ways to best describe that is to, instead of looking at all these numbers and pieces of data independently, what’s your tax rate? Or what is your interest rate on your loan? Or what is your income? You look at all these things and then compare them to each other. What’s income compared to collections? What’s income compared to spending and savings and net worth? And it’s comparing numbers, that’s how you tell a good story. And that’s how you tell a story with data instead of emotions too. And then the bad guy’s the data. The math is the bad guy.

Matt Mulcock:
We’re the bad guys at that point.

Ryan Isaac:
We’re like math teachers. You might’ve hated your math, I loved my math teachers actually.

Matt Mulcock:
I’m sure you would. Nerd, nerd.

Ryan Isaac:
I did. I am a huge nerd.

Matt Mulcock:
You nerd.

Ryan Isaac:
I loved math, man. I miss it. When my kids come home and they have math homework, I’m like, yes, let’s do it. And then they hate that though. The other point I want to make to a question for you, Matt, is how often do you think dentists like a snake.

Matt Mulcock:
Dentists.

Ryan Isaac:
Dentists miscalculate or misunderstand their income? Do you think that’s common? And number two, do they overestimate their income? Or do they underestimate their income? What do you think?

Matt Mulcock:
I’m going to say studies would show, I have no studies.

Ryan Isaac:
It just makes you sound better though. No one’s going to fact check that.

Matt Mulcock:
No one.

Ryan Isaac:
Studies show.

Matt Mulcock:
You can just say whatever you want nowadays.

Ryan Isaac:
Just start every sentence with studies show.

Matt Mulcock:
I’m pretty sure studies show. No, in my experience, I would say more often than not, they do not get it correct. They do not get it right. And they’re usually, I would say more times than not underestimating their income.

Ryan Isaac:
Yeah, I was going to say the same. Yeah. I was going to say the same thing. And we’re going to get into why they get this wrong. It’s because it’s pretty complex. It’s complicated. And they underestimate it because people usually just look at, they just remember what they filed on their personal tax returns because here and we’ll get to this in a second, but we’re trying to measure, what was your true gross cashflow income? Not what ended up on your personal return? Which you want to be as low as possible.

Matt Mulcock:
Of course.

Ryan Isaac:
For tax purposes. But that’s the number of people remember and it’s usually off by quite a bit, double digit percentages. Because that’s the number that hits your tax return, you want it to be low, it’s after all possible write offs and everything. But that’s the number in people’s head, but it’s misleading because, and we’ll get to this, but you got your hands on more cash than you reported on your personal tax return in a lot of situations. You speak French, fluently without further ado. Is that how you say that?

Matt Mulcock:
Obviously yes. I speak four languages.

Ryan Isaac:
You do. Actually, we’ll take a quick commercial break because I need to take a big deep breath and get ready for this.

Matt Mulcock:
On the Dentist Money Show, we teach dentists how to make smart financial decisions.

Ryan Isaac:
You’re correct.

Matt Mulcock:
Is that all it takes, Ryan to make smart financial decisions? Listening to our show?

Ryan Isaac:
Matt, it’s a good first step, but to put your financial future on the fast track, the next smart decision is to go to dentistadvisors.com. What you do there is you click on the book free consultation button, right in the middle of the home screen. And then you schedule a time to talk with one of our very friendly, dental specific financial advisors today.

Ryan Isaac:
Let’s just begin this journey, how do you calculate your income? We’re going to talk about practice owner. We hit real quick, if you’re a W2 associate, that’s easy. How do you determine income?

Matt Mulcock:
Those people already turned this off.

Ryan Isaac:
They shut it off.

Matt Mulcock:
They’re not even listening.

Ryan Isaac:
No, they want to know. They want to know, where does all my other income come from when I’m an owner? They want to know. Dentists, want to know, Matt.

Matt Mulcock:
They want to know. We’re keeping them hanging.

Ryan Isaac:
Yes. Let’s start with a simple formula and you can say the formula, I’ll give some of the ground rules here. This formula is based on what many dentists’ entity structures look like now. We’re not your CPAs. We’re not your attorneys so we’re not giving you legal advice on what to go set up for your entity. If you’re setting up an entity.

Matt Mulcock:
We collaborate with them all the time.

Ryan Isaac:
We do. We’re on their team, we’re a quarterback and they’re the wide receivers and running backs and they’re blocking and they’re catching and running.

Matt Mulcock:
It you’re basically Tom Brady.

Ryan Isaac:
I’m Tom Brady.

Matt Mulcock:
You’re Tom Brady.

Ryan Isaac:
We are the same age, which is incredible.

Matt Mulcock:
I’m on the bench. I’m your backup.

Ryan Isaac:
Yeah. We do, we coordinate with these people, but if you’re looking just as a caveat, looking to set up an entity, make sure you have a CPA and attorney looking this stuff over. First of all, I will say that many, many dentists and this is kind of the group we’re talking about, they end up having usually an escort. It might be an LLC or something, filing it as an S corp. But what that means is it’s a pass through entity so the money you receive through your business passes right through to your personal tax return. There’s not a separate tax rate at the business. A lot of people feel like, hey, if I just hold cash in my checking account, in this S corp checking account, I won’t be taxed until I move it.

Matt Mulcock:
I get that all the time.

Ryan Isaac:
All the time, really common and that’s a misconception. It’s no, the year it’s earned, it’s taxed, no matter where you put it if you’re an S corp. We’re going to kind of start with this as the premise because this is the really common set up for people. But Matt, what’s the basic formula for determining income as an owner?

Matt Mulcock:
Yeah. There’s four main pieces to it. It’s your salary plus your business.

Ryan Isaac:
I’m dancing as you’re talking. I got my four fingers up dancing.

Matt Mulcock:
There it is.

Ryan Isaac:
No one can see that.

Matt Mulcock:
It’s your salary plus your business income plus depreciation plus amortization.

Ryan Isaac:
All right. Salary, talking to W2. Business income, talking about net income, all that’s leftover.

Matt Mulcock:
Your profit.

Ryan Isaac:
After all bills are paid, profit. Depreciation and amortization, let’s dive into that for a second. But first let’s just say those four categories are going to cover the majority of income line items to you from your corporation. Now again, this is the gross cashflow amount of money you receive that you can do something with. From this comes your spending in your debt and your taxes, all that kind of stuff. But this is the gross amount of cash that you receive. From here, those numbers flow down to your personal tax return, but they’re reduced by 401(k) contributions, IRA contributions, HSA contributions, IRA contributions, a 179 expenses on the personal return, standard deductions, personal write offs and expenses, itemized deductions. That number gets further whittled away. But the gross income number that matches said W2, plus net income plus depreciation plus amortization, that’s the gross number of income that we use for our calculations.

Matt Mulcock:
It’s a starting point.

Ryan Isaac:
It’s a starting point. There’s some caveats, we’ll hit them. But when we say hit a 20% savings rate for 20 years, 20 for 20, we’re saying on that gross number, that’s what we’re saying, out of that gross cashflow. Otherwise, if it was the personal, it’d have to be a higher number or something. Anyway. That’s what we’re talking about. Let’s talk about these two categories, because this is a confusing one, depreciation and amortization. I’m going to give an example that makes sense in my head, as I say this, but Matt, please just tell me.

Matt Mulcock:
Oh I will, oh I’ll tell you.

Ryan Isaac:
To pause if it doesn’t make sense. I want to give an example of why this is counted back towards income for people. We’re going to use round numbers. Let’s just say you got an S corp, after all of the expenses are paid in the S corp, we’re talking your salary, your W2 whatever it is, all the overhead, everything. Let’s just say there’s a 100,000 bucks left over for net income, nice and clean and pretty. 100 grand and that’s your net income from the business. On the business tax return before you actually file that, if you have purchased something that is being depreciated, that’s build outs.

Matt Mulcock:
Wait, like a boat?

Ryan Isaac:
Like a boat.

Matt Mulcock:
No.

Ryan Isaac:
No. That’s not boat advice.

Matt Mulcock:
Something for their practice.

Ryan Isaac:
That was not boat advice. The boat sneaks in every time.

Matt Mulcock:
Sorry, summer’s coming up. I’m getting excited.

Ryan Isaac:
Yes, you’re getting ready. Yeah. A build out, equipment, new chairs, you depreciate that stuff. Depreciation means that you can spread out writing off the cost of that stuff over certain period of years. This is definitely an awesome CPA job. Most people are familiar with this. But you’ve got a 100 grand left over after all your expenses. Let’s say your CPA tells you, “You’ve got $25,000 in depreciation that year.” Cool. Awesome. There’s another item on here called amortization. Amortization is the write off, it’s kind of the depreciation of the practice you bought. The goodwill. Depreciation is the stuff you buy in the practice. Amortization is writing off the practice itself in terms of just the goodwill of the practice. Let’s say your CPA says there’s a 100 net in here. We’ve got a 100 grand left over, but here’s what’s cool, Mr. Client, your CPA says, “You’ve got 25 grand of depreciation for the stuff you bought.” You bought some scanners and chairs and stuff, “and you got 25 grand of amortization for buying the practice five years ago from the other guy who sold it to you.”

Matt Mulcock:
Boo yah.

Ryan Isaac:
Here’s the math and why we add this back in. Your business had a 100 grand left over sitting in the checking account after all expenses were paid, but on the tax return on the S corp, you got to deduct depreciation and amortization against that. And then that 100 grand for tax purposes turned into 50 grand. That 50 grand then flows to your personal return and then that’s how you pay taxes on. But what happened with cashflow? You were actually still sitting on a 100 because depreciation and amortization aren’t real cash item expenses. You didn’t write a check for them. That’s why we add this stuff back in. Some years, people’s depreciation and amortization are huge. It’s a huge amount of money.

Matt Mulcock:
It could be a new practice, new building, something. It could be massive, hundreds of thousands of dollars.

Ryan Isaac:
People writing off six figures of depreciation and amortization for the first, early years of their career or if they like do a huge project, relocation and build out. It’s very cool piece of the tax code as a business owner, but it doesn’t actually reduce your cash that you got to do something with. That’s why we’re measuring it that way. Here’s another question is someone says, “Well, how does 179 expenses work into that equation?” 179 expense is taken off of the personal return. Let’s go back to our example. Is the example still easy to follow? Are we good?

Matt Mulcock:
You’re doing a fantastic job.

Ryan Isaac:
Trying to speak slowly.

Matt Mulcock:
I’ve got a whiteboard here. I’m writing it all out.

Ryan Isaac:
You’re good. Let’s go back to our example. In your business, you’ve got a 100 grand leftover at the end and your CPA now comes to you and says, “We still have our 25 grand of amortization for buying the practice.” That’s not going to change. “But Mr. Dentist Client, we can either depreciate the stuff you bought over the next say five years, we can just slowly take a few chunks every year for the next five years or we can take it all in one year on this wonderful thing called 179 expense.” And all that means is you just write off the whole thing in one year. If you said, “Yeah, let’s do that. Let’s write it all off in one year. I want a low tax rate this year because I want a boat. I need the boat.”

Matt Mulcock:
Obviously.

Ryan Isaac:
Need the boat.

Matt Mulcock:
And you’re going to invite Matt and Ryan on the boat.

Ryan Isaac:
All right. You go all right, I had a 100 grand my 25 amortization is going to take me down to 75. Now that $75,000 gets reported down to your personal return. Remember, you still have a 100. You still actually got a 100 grand in your hand. Now at this point, I’ll just push pause, because at this point we’ve measured your income. We said W2 plus net plus depreciation plus amortization. In this case, we don’t have a depreciation, we just have W2, net, amortization, but we have our gross number. And so then it flows to the personal return, that $75,000 of net income from your business goes to your personal return, then your CPA goes, let’s take our 179 expense and let’s say there’s 75 grand of it because you bought 75 grand worth of stuff. And then all the net income on your personal return gets wiped out and your tax bill is low. That’s how it works. But did you actually not have a $100,000 that you could save or spend or pay down debt with? No, you still had a $100,000.

Matt Mulcock:
No, that money is real.

Ryan Isaac:
The money is real.

Matt Mulcock:
The money is real.

Ryan Isaac:
In both of those cases, you still had a 100 grand, the tax code just dictated what write offs happened at which level. For our purposes, just to reiterate this long story, we’re just measuring at the business level where the cash resides. What did you get?

Matt Mulcock:
What did you actually end up with?

Ryan Isaac:
What’d you get your hands on? That’s the story of the equation, W2 plus net plus depreciation plus amortization. That’s going to capture the majority of cases for people’s income. Now let’s pause there for a second. Matt, are there any things going through your head? Any questions? We’ll get to the caveats here, some of the exceptions or the nuanced things, but is there anything about that part that we should reiterate? Or explain different.

Matt Mulcock:
I just think to summarize what you just highlighted there perfectly I think is the misalignment between tax returns and what you actually end up with as income.

Ryan Isaac:
Which is cool.

Matt Mulcock:
Which is great. But you’re highlighting one of many reasons why it’s so confusing for people. It’s really confusing. Taxes are confusing, but if you’re just going off your tax return as a business owner, you’re not totally counting the actual income you ended up with.

Ryan Isaac:
Yeah. You’re not counting that cashflow, which doesn’t tell us the whole story. Then we’re not measuring well, are you sitting on too much cash? And why? And how did that happen? What’s your savings rate? And why was it low? Or why was it high? And we’re not measuring the right thing. That’s what we calculate. Let’s talk about some of the caveats and some of the nuances to this.

Ryan Isaac:
Are there other categories? Would be the question, besides those four main ones? Or if I have multiple entities, is that going to change things? I would first say as a general rule, you would just repeat the process for multiple entities. Let’s give an example. You own some real estate. Your real estate is owned by an LLC. Let’s say you have a $5,000 payment on your real estate and your S corp that has the dental practice pays real estate LLC, seven grand a month. You pay your note and you’ve got two grand a month leftover. In the real estate, LLC you’ll have a net income again. If you overpay your rent a little bit and you’ll have some depreciation in there as well. And maybe some other write offs or expenses that might come back to you as an owner, will flow back to you. You’d want to use the same formula. Obviously it’s probably not a W2 in that real estate LLC, but there’s usually depreciation. There might be some net as well. That would be an add back.

Matt Mulcock:
Hey, you also want to count that two grand.

Ryan Isaac:
That’s what I’m saying. For that net income.

Matt Mulcock:
You want to add back that two grand on the S corp.

Ryan Isaac:
That two grand is income. That’s two grand a month, 24 a year, that would be income back to you personally. That would end up back in our gross cashflow income calculation. That would be an example. That’s not uncommon by any means. You would just repeat the formula in that other entity where those four categories apply. W2, net, depreciation, amortization. Couple of them will, couple of them won’t.

Ryan Isaac:
Some nuance things though. Matt, what happens if I have five practices in a bunch of S corps, then some parent company that’s a C Corp? Or I started practicing dentistry 30 years ago when C corps were the main way that we did it and never changed.

Matt Mulcock:
C corps were a thing. They were in.

Ryan Isaac:
They were the cool things like bell bottoms and Afros and long sideburns. I’m watching WandaVision right now though.

Matt Mulcock:
How old are you?

Ryan Isaac:
No, I’m watching WandaVision.

Matt Mulcock:
You’re even older than I thought.

Ryan Isaac:
No, have you watched that yet? WandaVision?

Matt Mulcock:
No. I don’t get it. That’s a whole nother conversation.

Ryan Isaac:
Dude, it’s Marvel comic book. It’s so amazing. Anyway, I’m kind of into the old fifties and seventies now. But where were we? Yeah, the C corps.

Matt Mulcock:
The old C corps.

Ryan Isaac:
Lost me on bell bottoms. Yeah, C corps, they used to be the most common way dental practices had their corporate structure. Most of them went away. Went away by meaning people changed them to S corps.

Matt Mulcock:
They died.

Ryan Isaac:
Yeah. Sometimes people still try to get little fancy and tricky. I don’t hear it as much anymore, to be honest, I heard a lot more eight years ago or more, but every once in a while someone will be like, “Hey, I heard of you set up a C corp, it has all these different types of expenses and write offs inside of the C corp that are not in an S corp. Should I do it?” And first part of the answer is you’re right, there are different write offs and expenses and taxes in a C corp than an S corp. But should you do it? Let’s have a conversation through CPA. Answer is probably no.

Matt Mulcock:
Yeah, we don’t see them very often anymore.

Ryan Isaac:
Yeah. Matt, what are some nuances, if someone actually does have a legitimate C corp set up, what are some nuances that we might find in that that’s different than our formula from an S corp?

Matt Mulcock:
Well, the first thing I’m thinking of when you’re talking about a C corp would be that it’s not a flow through structure. You can be maintaining earnings and income within that structure carrying forward. And it’s a lot of different nuance to a C corp versus an S corp. I think the biggest, and again, this is a CPA discussion for sure, that we can help collaborate and align you with someone to have this conversation.

Ryan Isaac:
We’ll be on the team, we’ll sit at the table together.

Matt Mulcock:
Yeah, sit around the table and talk about it. But yeah, so there’s a lot of different nuance to the C corp versus the S corp. But again, the biggest one to me is that it’s not a flow through structure and you’ve got to figure out whatever I’m paying out is taxed.

Ryan Isaac:
Yeah, different tax structure.

Matt Mulcock:
Sorry, say that again.

Ryan Isaac:
I was saying, different tax structure at the corporate level too.

Matt Mulcock:
Way different tax structure within the C corp itself, different tax rates within the C corp. And then depending, so you’ve got the tax rate of the C corp structure. And then when you get paid out on that, you’re then taxed at ordinary income tax rates to yourself. It definitely can be a little bit more convoluted when you’re talking about a C corp versus an S corp.

Ryan Isaac:
Yeah. And there are entities that have legitimate C corp setups and usually they’re a bigger multi location things with a parent company that has a call center or a shared marketing division or a consulting division inside of their practices.

Matt Mulcock:
Yeah. There’s legit reasons to have it for big enough structure. There’s legitimate reasons to do it. And the tax benefits it provides, but very, very rarely do we see a two or three location doc that needs to set up a C corp.

Ryan Isaac:
Yeah. Just know I guess the moral of the story here is that if you have a C corp setup, there might be some other expenses out of the C corp that are actually personal cashflow income items that should be added back. And those will just have to be looked at on a case by case basis. But those would be most of the caveats, a couple other ones might be, there are some people who run some pretty heavy personal expenses through their business. Going back to the S corp, some of those expenses might be things you’re choosing to pay for that are personal expenses, whether you’re doing it legally or not. It’s up to you and your CPA. But if there’s pretty significant amounts of personal expenses getting paid out of the business, we’d want to take a look at those line items. Usually they’re not big. Some people it’s like, “Oh yeah, I paid like my cellphone bill or something or a subscription to something I like.”

Matt Mulcock:
There’s always that occasional person though, you talk to, Ryan, we come across it. It’s they’re literally paying for their entire life out of their business.

Ryan Isaac:
Out of the business. Your personal checking account is two grand a month in spending but your profitability is…

Matt Mulcock:
But you spend 18.

Ryan Isaac:
Your profitability is super low. Those would be add backs as well.

Matt Mulcock:
One I came just along those same lines, one that I came across recently. We come across this all the time, but I had a conversation recently with a client talking about this very thing. And it just kind of jogged my memory as we were talking about this being kids on payroll. Just want to make sure that your family members on payroll, so spouse or kids on payroll, just want to make sure you’re not forgetting that in your calculation.

Ryan Isaac:
Yeah. That’s actually a huge point. I would have totally forgot that. A lot of people have their spouse and kids on payroll that, each kid, some people are paying each kid up to the maximum of their standard deduction of 12 grand a year as of this year and then spouses. A lot of spouses are getting paid quite a bit of money. That’s personal family income that’s counted as an expense out of your corporation. That’s totally true. I was also going to say as another nuance, some people have quite large retirement plans. Now I’m talking about profit sharing, cash balance, pensions, that kind of stuff, where there will be a large expense out of the business account. But if you gave yourself a 100 grand in a cash balance contribution, then you got paid some money.

Matt Mulcock:
Yeah, exactly. And that’s income to you.

Ryan Isaac:
It’s income and you saved it. Look, the last like five minutes or seven minutes or whatever have been some pretty deep nuanced things. We’re bringing them up just to let you know that there are other cases and it’s everything’s not so simple and clean, but for the most part, if you’re really just trying to rive at a good number, just to wrap this all up here, then W2 plus net income plus depreciation plus amortization for most practice entity setups will get you pretty close to your true gross cashflow number. Now, please don’t go to your CPA and be like, “Dentist Advisors told me this is your calculating my income wrong.” No, we’re looking at different numbers.

Matt Mulcock:
Your CPA is probably, probably doing it right.

Ryan Isaac:
Likely filing the right way. And their job is to make that number as low as possible by the time all is said and done on your personal return. We’re trying to see it as high as possible on the business side, before it flows through to your personal return.

Matt Mulcock:
I think that right there needs to be stressed more, Ryan, these are two different things. When you’re planning cashflow for savings and investing, you want that income in that cashflow, you want to retain as much of that as possible.

Ryan Isaac:
As high as possible.

Matt Mulcock:
You want that number to be big. On your tax return, you want to avoid as much tax as possible. You want that number to be as low as possible. That’s I think again, we hit this a lot, but that gets lost on people all the time.

Ryan Isaac:
Yeah. These are two separate calculations. These are two different outcomes and we’re trying to get at something very different than a CPA is. And so, yeah, it’s very, very good to point that out, man. Anyway, hopefully that kind of clears up, if you’re wondering what did I earn? And how do I do this? You can pull up last year’s business tax return and just run that quick calculation and that’ll get you pretty close to it. And then from there what’s helpful is then you can start going, oh, how much went to savings? What did I spend? What did I actually pay for taxes? And what are all my loan payments in? What’s my net worth? And what were my collections? Now we have some pretty true gross numbers to compare all these other pieces of data to. Now that’s comprehensive financial planning. Now we have data to make informed decisions when it’s time.

Matt Mulcock:
Yeah, if the first question that you ask as you go through this exercise is, where did all that money go? This might be a first sign of ah, I need some help.

Ryan Isaac:
Yeah. Yeah. See, that’s the thing is this isn’t super hard to do. It’s just one of hundreds of little things that have to be done correctly and frequently in order to have the right data to make good decisions. Otherwise you don’t have data and you don’t have accountability to data to make decisions and then decisions become purely emotional or they become just very siloed. You make a real estate decision.

Matt Mulcock:
You’re looking at things in a vacuum.

Ryan Isaac:
Yeah. Total vacuum. A loan or real estate decisions only in that little sliver, its own vacuum, its own little universe and not being compared to all the other numbers out there. If you’re wondering, well, what does Dentist Advisors do? How do they help me? That’s our job. It’s all those hundreds.

Matt Mulcock:
It’s what we do.

Ryan Isaac:
It’s what we do, guys. It’s all those hundreds of little things that have to be calculated frequently, the right way and compared to each other. That’s our job. If you have questions about it, go to the website, dentistadvisors.com, click on the book free consultation button and chat with one of our friendly, dental specific probably good looking advisors.

Matt Mulcock:
If you get Ryan, absolutely.

Ryan Isaac:
Now, we’re talking.

Matt Mulcock:
If you want to see what the bus is like inside.

Ryan Isaac:
Just get on the bus, guys. That’s all we’re saying. If you resonate with this and you’re like, man, I need someone else to just do this for me in my life. It’s time, I’m busy. I need to live my life and then work, just get on the bus guys. The bus is always open. The bus actually extends as much as it needs to be. We just keep adding, we add new wings to the bus.

Matt Mulcock:
Ryan pulls out his little welder.

Ryan Isaac:
Yeah, I weld.

Matt Mulcock:
He just starts welding other pieces to the bus.

Ryan Isaac:
A new section of the bus. It’s one of those, yeah, you see them in giant cities.

Matt Mulcock:
Renaissance man.

Ryan Isaac:
Yeah. I guess so. It’s one of those flexible.

Matt Mulcock:
Is it a double decker?

Ryan Isaac:
Double deckers.

Matt Mulcock:
Is it a double decker?

Ryan Isaac:
It will be eventually. Yeah. We’re getting there. Thanks guys. And if you have any questions too, an easy way to do this is go to Dentist Advisors discussion group on Facebook, post a question. Me and Matt will send you an answer in a video. It’s really nice. And Matt, thanks for joining me.

Matt Mulcock:
Thanks, Ryan.

Ryan Isaac:
You guys, thanks for listening and we’ll catch you next time. Take care.

 

Cash Management, CE