Navigating Tax Planning for Healthcare Businesses: A Case Study of ‘Practice, LLC’

Introduction

At TaxRx Group, we specialize in providing comprehensive tax advisory services tailored to the unique needs of our clients. This blog presents a detailed case study of how we assisted an orthodontist client and their business, ‘Practice, LLC’, in optimizing their tax situation. Our expert team leveraged a variety of strategies to maximize tax savings for both personal and business taxes.

Client Profile

• Client: Orthodontist
• Business: Practice, LLC
• Annual Revenue: $1.3M
• Significant Acquisition: Equipment valued at $125k

Tax Planning Strategies

Our approach involved a mix of personal and business tax strategies. Here’s how we categorized and implemented them:

Personal Tax Strategies

1. Self-Directed Retirement Funds:
   • Objective: To save for retirement while reducing current taxable income.
   • Strategy: Investing in a self-directed retirement fund allows greater control over retirement savings, offering diverse investment opportunities.
   • Key Steps:
     1. Selection of appropriate retirement fund vehicles.
     2. Allocation of a portion of income to these funds.
2. Oil & Gas Investments:
   • Objective: To utilize tax benefits associated with energy investments.
   • Strategy: Investing in oil and gas ventures can offer significant tax advantages, including deductions for intangible drilling costs.
   • Key Steps:
     1. Identifying qualifying oil and gas investment opportunities.
     2. Structuring investments to maximize tax advantages.
3. Deferred Compensation Plan:
   • Objective: To defer income taxes on a portion of earnings.
   • Strategy: A deferred compensation plan allows deferral of income to future years, reducing current tax liability.
   • Key Steps:
     1. Establishing a deferred compensation plan.
     2. Deciding on the deferral percentage of annual income.

Business Tax Strategies

1. S Corporation:
   • Objective: To benefit from pass-through taxation.
   • Strategy: Electing S Corporation status can reduce taxable income through salary and dividend distributions
   • Key Steps:
     1. Filing necessary paperwork to elect S Corporation status.
     2. Managing payroll to optimize salary and dividend distribution.
2. Accountable Plan:
   • Objective: To reimburse employees tax-free for business expenses.
   • Strategy: Reimburse employees for business expenses tax-free under an accountable plan.
   • Key Steps:
     1. Implementing a formal accountable plan.
     2. Tracking and documenting all reimbursable expenses.
3. Augusta Rule:
   • Objective: To deduct rental expenses for business use of the home.
   • Strategy: Rent out personal residence for business events for up to 14 days annually, tax-free.
   • Key Steps:
     1. Determining eligible rental periods.
     2. Keeping accurate records of rental use and expenses.
4. Home Administrative Office:
   • Objective: To deduct home office expenses.
   • Strategy: Deduct a portion of home expenses if a section of the home is used exclusively for business.
   • Key Steps:
     1. Establishing a dedicated home office space.
     2. Calculating and documenting deductible expenses.
5. Section 412(e)(3) Plan:
   • Objective: To provide a fully insured defined benefit plan.
   • Key Steps:
     1. Setting up the plan with an insurance company.
     2. Determining annual contribution levels.
6. Health Savings Account (Business):
   • Objective: To offer tax-advantaged health benefits.
   • Strategy: Contribute to employees’ HSAs for tax advantages.
   • Key Steps:
     1. Setting up an HSA for employees.
     2. Determining contribution levels.

1. Employee Achievement Award:
   • Objective: To provide tax-free awards to employees.
   • Key Steps:
     1. Establishing a formal employee recognition program.
     2. Ensuring awards meet IRS guidelines for tax exemption.
2. Self-Employed Health Insurance Fringe Benefits:
   • Objective: To deduct health insurance premiums.
   • Strategy: Offering fringe benefits like health insurance can be tax-efficient for the employer.
   • Key Steps:
     1. Establishing a health insurance plan under the business.
     2. Documenting premium payments for deduction.
3. Family Office Management Company:
   • Objective: To manage family investments and expenses efficiently.
   • Key Steps:
     1. Setting up a separate entity for family office activities.
     2. Structuring investments for tax efficiency.
4. Section 179 Expensing:
   • Objective: To immediately expense the equipment purchase.
   • Strategy: Immediate expensing of certain business property, like equipment.
   • Key Steps:
     1. Verifying the eligibility of the equipment for Section 179.
     2. Calculating the deduction and applying it to the tax return.

1. Child IRA:
   • Objective: To save for children’s future while reducing taxable income.
   • Strategy: Set up and contribute to IRAs for children employed by the business.
   • Key Steps:
     1. Opening IRA accounts in children’s names.
     2. Determining annual contribution amounts.

1. R&D – Alternative Simplified Credit:
   • Objective: To claim tax credits for research and development.
   • Strategy: Claim tax credits for qualifying research and development activities.
   • Key Steps:
     1. Identifying qualifying R&D activities.
     2. Calculating and claiming the credit.
2. Captive Insurance
   • Objective: To claim tax credits for research and development.
   • Strategy: Create a small insurance company to insure against business risks.
   • Key Steps:
     1. Establish a captive insurance company.
     2. Transfer risks from the business to the captive insurance.
     3. Manage and fund the captive insurance properly.

    

Integrating Personal and Business Tax Benefits

Flow-Through Process:

1. Business Savings: By implementing strategies like S Corporation status and Section 179 expensing, the business reduces its taxable income.
2. Personal Benefits: The reduced business income flows through to the personal tax return, lowering overall tax liability.
3. Reinvestment: Savings from both business and personal tax strategies are reinvested to maximize growth and further tax efficiency

Conclusion

In summary, the judicious application of these tax strategies can significantly enhance the financial health of both your personal and business affairs. By understanding and leveraging these methods, Practice, LLC has positioned itself for substantial tax savings and long-term growth. The synergy between personal and business tax planning is a powerful tool in optimizing your overall tax situation.

At TaxRx Group, our expertise lies in customizing these strategies to fit your unique circumstances. Whether you’re an orthodontist like our client or operate in a different field, our dedicated team is ready to guide you through the complexities of tax planning. We encourage you to schedule a consultation with us. Together, we can explore how our specialized services can benefit you and your business, paving the way for financial success and peace of mind.