John K. McGill, MBA, CPA, JD, and Bo Elliot, CPA
For more on this topic, go to www.dentaleconomics.com and search using the following key words: tax deductions, financial planning, dental equipment purchasing, practice transitions, associateship, John K. McGill, MBA, CPA, JD.
Even with the soft economy, many doctors find themselves in the same old spot every year, searching for tax deductions on Christmas Eve. Their purchasing decisions are driven by tax avoidance and, in some cases, a desire to justify the latest and greatest gizmo. Boys do like their toys! But is there a better way?
What if you developed a detailed plan to manage your fixed asset purchases and your cash flow? This would require some forethought on your part. You will have to think about your plans for the practice:
• Is your location suitable for the long term?
• What is the age and condition of your equipment?
• Does your office present the image you would like to your patients?
• Do your current office and dental equipment allow you to practice as you would like, or are you tolerating a third-rate setup?
Let’s say that you are a 50-year-old doctor with an office in a good location, but your practice is in need of some updating. You are beginning to think of retirement and know it would be wise to keep the practice up-to-date and appealing to a future young associate.
Your first step should be to develop an idea of what your end product will be. Begin with the end in mind, as Stephen Covey would say. Your dental supply equipment representative can be a valuable partner in this process, knowing what is available in the market and what is on the way. Together, you can develop a plan for refurbishing the office, including a list of equipment needed, along with the cost.
You will need to consider a timetable for these improvements. All the while, you must remember your purpose: You are developing an office that will be very attractive to a future buyer. You want the office to be at its best, and most up-to-date, when you enter the market seeking a buyer.
On the other hand, new purchases can impact your practice productivity immediately. You must carefully evaluate your options, considering how you want to practice. Be prepared also to get lots of advice from your staff.
Next comes the most difficult part. You must match your plan with your pocketbook. Your accountant can be of great help here. Together, you must examine your current financial situation. How much debt are you currently servicing? When will you pay it off and free up funds for new debt? Is your practice generating a strong cash flow? Do you have cash left over after supporting your lifestyle? Is your practice growing?
As you consider these factors, a picture will begin to emerge. You will see how the practice is meeting the demands that are placed on it. You will be able to match the expiring debt service with the new debt needed to fund your improvements. You will know when you can make the new acquisitions, and you will not be held captive by the need to make last-minute tax-based purchases. You will have a realistic capital spending plan for the next three to five years and beyond.
Think about where you will find yourself in a few years. You will have a long-term plan for your asset acquisitions, debt service, and income tax liabilities, which will result in the perfect office environment for you. You can relax, knowing you have thought out your future and planned accordingly.
One final word — this plan is flexible. It is made to be adjusted as facts change. Just don’t make those changes in the rush of December.
John McGill, MBA, CPA, JD, provides tax and business planning exclusively for the dental profession and publishes “The McGill Advisory” newsletter through John K. McGill & Company, Inc., a member of The McGill & Hill Group, LLC. Bo Elliot, CPA, provides accounting and CPA services through Elliott Davis, affiliate of The McGill & Hill Group, a one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit www.mcgillhillgroup.com for more information.
