Charles Blair, DDS and
John McGill, MBA, CPA, JD
Recently, I have heard a great deal about changing the organization of my dental practice from an unincorporated sole proprietorship to a limited-liability company. I understand that there are tremendous advantages to this and would like information on how to proceed.
A limited-liability company does provide some limitation of malpractice liability for one practitioner for the acts of a partner. This is extremely beneficial vs. most unincorporated general partnerships where each doctor is not only fully liable for his or her own acts, but also the acts of a partner.
From a tax standpoint, most limited-liability companies are treated as partnerships for federal and state income-tax purposes. Accordingly, each doctor`s pro rata share of income, expenses, deduction and credits are shown on each partner`s K-1. Thus, the partnership itself pays no federal or state income taxes, but rather each partner`s pro rata share of the practice`s income flows through to him individually and is reported on federal and state individual income-tax returns.
While this partnership tax treatment effectively avoids the possibility of double taxation on annual practice profits, and in the event of the sale of the practice, there also are some negatives. Under current tax law, each doctor in a limited liability company is treated as a partner in a partnership, and thus is not able to receive fringe benefits such as medical insurance, disability insurance, medical reimbursement plan, diagnostic expense plan benefits, cafeteria plan, dependent-care assistance benefit plan and other fringe benefits on a basis that is fully deductible to the practice, yet which does not represent taxable income to the doctor. By comparison, the fringe benefits mentioned above are fully deductible to doctors in a regular C corporation and are completely tax-free to the individual doctors. Accordingly, the loss of these tax-free fringe benefits is a serious drawback in a limited-liability company.
Finally, most state laws require that there must be at least two doctors involved in the practice in order to form a limited-liability company. So, limited-liability company status will not be appropriate for the 75 percent or so of dentists who conduct business as sole practitioners.
Given the limitations, we have found the limited-liability company status is appropriate and recommended in the context of a few group practices, and is usually appropriate in the group ownership of practice real estate. For additional free information on this topic, send a stamped ($.52) self-addressed business envelope to Blair/McGill & Company, 4601 CharlottePark Drive, Suite 230, Charlotte, NC 28217 and request "Is A Limited-Liability Company In Your Future?"
Not long ago, I received a notice from the IRS that I owed additional taxes from 1989 involving a limited-partnership tax shelter that "blew up." The IRS notice requested additional taxes, interest and penalties of over $30,000, which I do not have the ability to pay. What should I do?
The first step in your situation is to determine if the IRS notice is correct. General tax rules provide a three-year statute of limitations from the date of filing a tax return. Accordingly, if you filed your 1989 return on or before April 15, 1990, the statute of limitations for additional assessments or deficiencies would have expired on or about April 15, 1993. You need to determine if you have previously executed an agreement with the IRS (Form 870) agreeing to extend the statue of limitations. If not, the notice you received may well be invalid.
If you previously agreed to extend the statute of limitations, the next step is to contact the general partner who may have additional information that could benefit you, including the reasons for the additional IRS assessment and related penalties, and the partnership`s position as to whether or not the additional assessment and related penalties are valid. In addition, the general partner should be able to tell you whether or not there was any agreement between the partnership and the IRS with respect to the additional amounts assessed that would foreclose the possibility of litigating those issues.
If it turns out that the statute of limitations has not expired and that the assessment has arisen from an agreement with the IRS entered into by the general partner of the partnership, contact a revenue officer (collection agent) at the IRS regarding your inability to pay. The IRS may then be able to structure an installment payment arrangement for you, or enter into an agreement for offering a compromise, based upon your inability to pay.
I spoke with a colleague of mine regarding what would happen to our practices in the event of one of our deaths. He indicated that he had some special provisions placed in his will to cover this contingency. I told him that this would not be necessary in my case, since I had given power of attorney to another doctor to take care of my practice and sell it in the event of my death. He said that this was not good. I disagree. Who is correct?
He is. A power of attorney is effective during your lifetime in order to allow another individual or individuals to take certain actions with respect to your assets, including your practice. At your death, the power of attorney no longer is legally valid since it is impossible for an agent to have any authority once the principal (you) has died.
So, in order to have an effective practice continuation program at your date of death, it is necessary for you to place certain directives in your will. These directives should set forth to the legal representative of your estate (executor or executrix), your wishes regarding the disposition of your practice. This may name one or more individuals or companies whom you would like to handle your practice; or it may simply name individuals who should be contacted, including those who have expressed an interest in your practice in the past.
Since your practice is a valuable, but volatile, asset, it makes sense to adequately prepare for its transfer in a timely and orderly manner in the event of disability or death.
If we buy a sport utility vehicle as a business car, can we immediately write this off on our practice tax return?
Section 280 of the Internal Revenue Code restricts write-offs for business cars. Under the law, luxury cars are defined as passenger vehicles weighing 6,000 pounds or less.
Although some sport utility vehicles may weigh more than 6,000 pounds, the doctor is not entitled to an immediate write-off. Rather, the cost of the qualifying sport utility vehicle may be written off over a five-year period, to the extent it is used for business purposes.
Dr. Blair is a nationally-known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($130 a year) and consulting information are available from Blair/McGill and Company, 4601 CharlottePark Drive, Suite 230, Charlotte, NC 28217, phone (704) 523-5882.