In order to take advantage of two important depreciation tax breaks for business assets for your medical or dental practice, you must place the assets in service by the end of the tax year. So you still have time to act for 2016. 

Section 179 deduction 

The Sec. 179 deduction is valuable because it allows businesses to deduct as depreciation up to 100% of the cost of qualifying assets in year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and leasehold improvements. Beginning in 2016, air conditioning and heating units were added to the list.
 
The maximum Sec. 179 deduction for 2016 is $500,000. The deduction begins to phase out dollar-for-dollar for 2016 when total asset acquisitions for the tax year exceed $2,010,000.
 
Real property improvements used to be ineligible. However, an exception that began in 2010 was made permanent for tax years beginning in 2016. Under the exception, you can claim a Sec. 179 deduction of up to $500,000 for certain qualified real property improvement costs.
 
Note: You can use Sec. 179 to buy an eligible heavy SUV for business use, but the rules are different from buying other assets. Heavy SUVs are subject to a $25,000 deduction limitation.

First-year bonus depreciation 

For qualified new assets (including software) that your business places in service in 2016, you can claim 50% first-year bonus depreciation. (Used assets don’t qualify.) This break is available when buying computer systems, software, machinery, equipment, and office furniture. 
 
Additionally, 50% bonus depreciation can be claimed for qualified improvement property, which means any eligible improvement to the interior of a nonresidential building if the improvement is made after the date the building was first placed in service. However, certain improvements aren’t eligible, such as enlarging a building and installing an elevator or escalator.

Contemplate what your business needs now

If you’ve been thinking about buying business assets, consider doing it before year end. This article explains only some of the rules involved with the Sec. 179 and bonus depreciation tax breaks. Contact us for ideas on how you can maximize your depreciation deductions.
As the end of 2016 approaches, it's time for employers to think about filing Forms W-2 and 1099. Forms W-2 are issued to employees to report compensation, withholding tax, and other items related to compensation. Forms 1099 are most commonly issued by businesses for payments in excess of $600 to vendors for services, rent, and other miscellaneous types of income. Forms 1099 do not need to be issued for purchases of inventory or other products.  
 

Filing Deadlines

 
For calendar year 2016, the due date for sending Forms W-2 and 1099 to employees and vendors remains January 31, 2017.  
 
In previous years, the due date for sending copies of these forms to the Social Security Administration (SSA) and to Internal Revenue Service (IRS) was the end of February. But for calendar year 2016, the due date for sending copies of the forms to SSA and IRS has been moved up to January 31, 2017.  
 
The IRS indicates that receiving the forms earlier will make it easier to verify income and withholding reported on individual income tax returns and to hopefully identify potentially fraudulent requests for refunds.   
 

Penalties

 
The IRS continues to impose strict penalties for late or non-filers as well as for those with incomplete or erroneous information. And it is important to note that separate penalties may apply: one for the filing and one for the payee statement. For example, if you fail to file a correct Form 1099-MISC with the IRS and  don't provide a correct Form 1099-MISC statement to the payee, you may be subject to two separate penalties.   
 
As in prior years, business owners are required to attest to having filed these forms on their business income tax returns.

Additional Notes on Forms 1099

In order to complete Form 1099, the business needs to obtain the name, address, tax entity type, and tax ID number for the vendor. If the vendor is an LLC, the business needs to know if the LLC is taxed as a single-member LLC, a partnership, or an S-corporation. Forms 1099 do not need to be issued to S-corporations or C-corporations unless the corporation is an attorney’s office.   
 
Form W-9, Request for Taxpayer Identification Number and Certification, can be used to gather this information. Ideally, the form should be completed prior to payment to the vendor. We recommend businesses have a policy that vendors must complete and return Form W-9 before the business issues payment to avoid the scenario of scrambling at year end to get information that may be difficult to gather.
 
If the vendor uses a “DBA” (doing business as), that should be indicated on the W-9 and this name also needs to be shown on the Form 1099. Forms 1099 must be filed with the name registered with the IRS tax return and EIN. You may not use a Social Security number along with a business name.
 
Once forms are received, the IRS matches the names and tax identification numbers with income tax returns. The business will receive a notice if the identification number reported on the 1099 doesn’t match IRS records. If incorrect information isn’t corrected, IRS will notify the business to withhold 25% from future payments and remit this to the IRS. This is referred to as “backup withholding” and can be a cumbersome process. 
 
Instructions and forms can be found on the IRS website at www.irs.gov.  We are happy to answer questions and can complete these forms for you or train you how prepare the forms using QuickBooks.   
 

Changes to Deadlines & Penalties at a Glance
Form Deadline
2016 Forms W-2, W-3,  and certain Forms 1096 and 1099-MISC  January 31, 2017
2016 Forms 1099-MISC, if reporting nonemployee compensation payments in box 7 January 31, 2017
Late Filing of Forms W-2, W-2G, 1098 and 1099 Penalty
2016 information returns filed less than 30 days late $50 per return with a maximum fine up to $186,000
2016 information returns filed over 30 days late, but filed before August 1, 2017 $60 per return with a maximum penalty of $532,000
2016 information returns filed after August 1 or not at all $260 per return with a maximum penalty of $500,000. 
2016 information returns not filed due to intentional disregard of the rules $530 per return with an unlimited maximum penalty!

 

We are quickly approaching the end of 2016. Now is the time to consider some year-end tax savings strategies for your practice, before the year – and the opportunity – slips away.

Good News Bad News

The good news is that we have more certainty from a tax perspective this year because Congress made permanent many long-favored tax breaks (called extenders) late last year. The national elections, however, bring a fair amount of uncertainty to tax and financial planning.

Important Considerations

No matter the results of the election, though, there are important considerations to keep in mind as your practice plans for year-end:

Defer or Accelerate?

Since tax rates in 2016 and 2017 are the same, in many cases it might make sense to plan ahead to defer income into 2017 and accelerate deductions into 2016. You will, of course, need to confer with your business tax advisor and take into consideration your tax accounting method and other elements of your tax planning process.

Section 179 Expensing and Bonus Depreciation

If you are contemplating the purchase of business assets, consider using the Section 179 expense deduction to claim significant write-offs for the cost of new and used equipment, software additions, and improvements to interiors of leased nonresidential buildings. The maximum amount of qualifying property that a business can expense for 2016 is $500,000. If the total of qualifying property purchased in 2016 exceeds $2,010,000, the amount of the Section 179 limitation is reduced dollar for dollar equal to the amount of excess purchases.
 
A couple of cautions to keep in mind: 
The 50% bonus depreciation deduction is also available for new property purchased in 2016. The combination of Section 179, 50% bonus depreciation and normal first year depreciation provides significant possibilities for reducing taxable income.
 
There are many factors that go into the decision to acquire business assets—many of them non-tax factors. However, the Section 179 deduction and other depreciation deductions should play a role in your decision making process and could enable your practice to obtain property you need earlier and at reduced after-tax costs.

We can help

If you are uncertain about what steps make sense for your practice to take before year-end, call us. We can discuss your particular situation and offer advice on what makes sense for you and your practice.

One of the most common inquiries clients have for their accountants is “What documents do I need to save, and for how long?” Retaining, organizing, and filing old records can become a burden, both at the business and individual levels. As we all strive to achieve a more "paperless" process, how do we determine what warrants taking up valuable office and storage space and what does not?

Records should be preserved only as long as they serve a useful purpose or until all legal requirements are met. To keep files manageable, it is a good idea to develop a schedule so that at the end of a specified retention period, certain records are destroyed.

At Stockman Kast Ryan + Co., we have developed a Records Retention Schedule we think you will find helpful. Although it doesn't cover every possible record, it does cover the most common ones. As always, please feel free to ask us should you have specific questions or concerns.

Records Retention

 

In addition to providing for your own retirement needs, a qualified retirement plan also offers valuable tax savings for the dental practice, and can help attract and retain quality employees. The good news is that you don’t need to invest in a complicated plan. There are several retirement plans that actually look, act and feel like a traditional 401(k) plan —without the cost and complexity. This is not an all-inclusive list, but is intended to discuss a couple of the more popular plans for dental practices. 
 

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a good start-up plan for small dental practices that do not currently sponsor a retirement plan. You agree to match up to 3 percent of an employee’s salary dollar-for-dollar or make a 2 percent non-elective contribution for each eligible employee. If the employee contributes 2 percent of salary, the practice matches that 2 percent. If an employee contributes 10 percent, the practice is only on the hook for the 3 percent match. 
 
Pros: 
 
Affordable to set up and maintain — Just use the forms provided by the IRS, set up the plan and notify your employees. You may be eligible for a tax credit of up to $500 per year for each of the first three years for the cost of starting the plan.  Administrative costs are minimal, and no annual IRS reporting is required. 
 
Matching contributions are deductible — Money you put in for employees is deductible as a business expense. 
 
Employees have control of their retirement savings — Employees can terminate their salary reduction contributions, and may roll over their funds to a traditional IRA or another employer’s retirement plan at any time. 
 
Cons:
 
Contributions are mandatory — As the employer, you are required to make contributions to your employee’s accounts each year — even if the practice is having a lean year. You can choose whether to make a matching contribution up to 3 percent of salary or a 2 percent non-elective contribution for each eligible employee. You must give written notice of the funding percentage annually to each participant no later than 120 days after the plan year ends. You can also reduce the matching percentage, but not below 1 percent, and not for greater than 2 out of every 5 years. 
 
Employer contribution limits  could be lower — The maximum contribution amount for an employee is $12,500 for 2016  — quite a bit lower than other retirement plans. Employees older than 50, can make an additional $3,000 catch-up contribution each year Employers are limited to the amount of contributions discussed above. 
 
There is a deadline for opening — SIMPLE IRA accounts must be opened by October 1 in order to make contributions for that tax year.
 

SEP IRA

A Simplified Employee Pension (SEP) IRA is a good choice for solo practitioners or those with just a few employees. Contributions are paid directly into an IRA created for each employee, and the same investment, distribution and rollover rules as a traditional IRA apply. Contributions to a SEP are tax deductible, and the practice pays no taxes on the earnings on the investments. The employee is also free to supplement the SEP-IRA with another retirement plan. 
 
Pros:
 
Easy set-up and maintenance — Just like a SIMPLE IRA, set up is simple and fees are minimal. In addition, there are no annual filing requirements with the IRS.
 
Larger employer contributions are possible — The practice may contribute up to the lesser of $53,000 (2015-2016) or 25 percent of compensation for each  participant. 
 
You don’t have to contribute every year — You are not locked into making annual contributions. In fact, you decide each year whether, and how much, to contribute to your employees’ SEP-IRAs. 
 
Cons:
 
The employer makes all of the contributions — Unlike a SIMPLE IRA, where part of the contribution can be taken out of employees’ salary, a SEP IRA requires the employer to make 100 percent of the contributions.
 
Contribution percentage must be the same for everyone — You cannot pay yourself a higher contribution percentage than your employees.
 
All employees must be included if they meet minimum requirements — This can be expensive as the practice grows and you start adding employees. 
 
 
Dental professionals often neglect retirement savings while building their practice. Yet, building a nest egg for yourself and your employees doesn’t have to be complicated or expensive. 
 
We can help recommend, based on your retirement goals and other factors, what type of plan would be best suited for your practice.

Stay on top of filing and reporting deadlines with our tax calendar! Our tax calendar includes dates categorized by employers, individuals, partnerships, corporations and more to keep you on track. 

2016 Tax Calendar_Quarters_3-4

 

It’s a fact of life that physicians and dental professionals operate under an increased level of scrutiny. Increasingly, compliance checks are digging in to more than charts and coding. The IRS is paying particular attention to these hot-button compliance areas: 

Worker misclassification 

Is your practice classifying hired physicians as independent contractors? The IRS may come knocking for a look at your payroll records. Violations can result in practice owners and officers being held individually liable for back payroll taxes (including withholding taxes) plus penalties and interest. 

Generally, for professionals, the IRS looks at three important factors to make the legal distinction between the employee vs. contractor status of a physician/dentist:

Experts in employment law say that, against this backdrop, most hired physicians/dentists legally fall under the category of employee. Obvious exceptions include physicians and dentists who do locum tenens or who have their own professional medical entities and bring their own ancillary personnel to the job.

Action:  To avoid sending up an audit red flag, don’t convert an existing physician employee to contractor status unless he or she has a significant change in job duties. And if you have workers doing the same job, don’t classify some as employees and others as contractors. Consult your attorney regarding appropriate classification and contracts.

Read More: To learn more about this important issue, see our January, 2016, article here.

Medical buildings

Physicians who own their medical building are facing increased IRS scrutiny. In particular, auditors are looking for the cozy transactions that can occur when the medical practice is both the tenant and the landlord. 

Action: Experts say the best approach is to treat it as if you were renting office space from someone you didn't know. Have a formal lease in place and make payments by physically writing a check or transferring money from your practice account into a separate medical building account. 

Sales and use tax

Most states impose a “use tax” on certain personal property that was purchased from a seller outside of the state for use in that state. Essentially, it taxes the use of goods on which no sales tax has been paid. Unlike sales taxes, which are charged and collected by the vendor, the use tax is self-reported by the purchaser. 

Action: If you purchase supplies or equipment from out-of-state vendors, determine whether state and local sales tax applies to these items. Then report any taxable sales on your monthly or quarterly sales tax report. Ask your CPA for guidance in this critical area.

Retirement plan audits

Managing the typical 401(k) plan can be incredibly challenging, and the IRS (and Department of Labor) cuts offenders no slack. Penalties for noncompliance — even unintentional errors — may be severe, and can even result in the loss of a plan’s tax-deferred status. 

One of the most common compliance errors involves failing to follow the terms of your original plan document — either taking actions that aren’t covered or allowed, or making changes to the plan document and then not following them in day-to-day practice. For example, maybe you’ve begun allowing participants to take out loans and hardship distributions, even though these weren’t included in your original written plan. 

Action: Make sure you understand how to detect — and correct — errors in plan administration. Start by downloading the IRS’ comprehensive 401(k) Fix-It Guide at http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf.

 

Head off an audit before it occurs by taking steps now to identify potential compliance problem areas. Contact our office for guidance in ensuring that your practice remains compliant in all areas of operation.

Reviewing end-of-quarter financials is one thing, but there are certain financial reports that practice owners should be reviewing at least on a monthly basis. These include: 

#1 Profit & Loss

Your P&L includes a treasure trove of core financial indicators. A monthly review can help you spot any troubling trends in revenue, overhead and net profit.

Action: Create a Profit & Loss statement that displays each revenue and expense line item in dollar amounts as well as percentages. Provide comparisons to previous periods and budget amounts. As an added step, use data from your state medical society or organizations such as the Medical Group Management Association to benchmark your revenue and expenses against similar practices.

#2 Receivables

Monitor how well you are turning cash over and getting it into the practice each month by reviewing an Aging Report, which measures the percent of your accounts receivable in each “aging bucket.” In an ideal AR scenario, your receivables would fall roughly into the following buckets: 0-30 days = 60 percent, 31-60 days = 20 percent, 61-90 days = 5 percent, 91-120 days = 5 percent, and over 120 days = 10 percent. 

Action: If the indicators signal a problem, you’ll want to dig deeper. For instance, if you’re seeing a steady increase in receivables over 90 days, review A/R by individual payer. Try to identify the reasons for the delay by analyzing EOBs for denial patterns. 

 #3 Adjustments

Write-offs can run the gamut from denials and contractual adjustments to discounts for multiple procedures. Substantial variations to your normal adjustment rate can be a sign of anything from a change in billing patterns to embezzlement.

Action: Depending on your billing cycles and productivity, adjustments can follow charges by two to eight weeks. To accommodate for this, compare the current month’s adjustments to charges and collections from the prior month or even the month before. 

#4 Patient Balances

Just as important as what insurance companies owe you is what patients owe you. This has taken on added significance as patients foot more of their healthcare bills. 

Action: Skip the alphabetic listing and generate a report by patient account in descending balance order — so that the largest balances will be front and center. Ask for an update from your billing department and/or practice manager on the status of the top 10 or so accounts. Next, review the payment status of patients who are on payment plans. Finally, determine which patient accounts should be sent to collections or written off as bad debt.

Get Out Your Stethoscope

Just as you monitor the vital signs of your patients, you will also need to monitor the signs that reveal your practice's financial health. Have your practice administrator, physician manager or independent advisor conduct monthly monitoring of these key reports. Then, schedule a regular monthly meeting to review and discuss the information with all stakeholders in the practice.  

Contact our office to learn more about monitoring your practice’s financial indicators —or for help in understanding what your current indicators are saying.

If you’ve been bitten by the net investment income tax (NIIT) in the past three years, you may be ready now to get more serious about exploring strategies to avoid or reduce your exposure to this complicated 3.8% Medicare surtax on investment income. Below are ten strategies to minimize the bite of this surtax in 2016 and succeeding years.

  1. Sell securities with losses before year-end to offset gains during the year from the sale of securities.
  2. Donate appreciated securities instead of cash to IRS-approved charities so that gains won’t be included on your return even though you will receive a tax deduction for the donation.
  3. Use installment sales or Section 1031 like-kind exchanges to either spread the gain recognition over several years or defer the gain on the sale of property. These two strategies work best for investment real estate.
  4. Invest more taxable investment funds in municipal bonds. Interest income from municipal bonds is federally tax exempt and also state exempt as well, if bonds are issued by your resident state. If you are subject to the NIIT, be sure to include the 3.8% in your municipal bond interest conversion calculation.
  5.  Invest taxable investment funds in growth stocks. Gains won’t be taxed until the stocks are sold, and growth stocks generally do not distribute dividends.
  6. Consider conversion of traditional IRA accounts to ROTH accounts. This idea is part of a long-term strategy and requires careful coordination with your tax and investment advisors, because the taxable income from the conversion does increase your taxable income and may result in more of your investment income being subject to the NIIT in the year of the ROTH conversion. In the future, though, this strategy could result in tax savings since the earnings and gains inside the ROTH will be exempt from both income tax and the NIIT when distributed.
  7. Invest in life insurance and tax-deferred annuity products. Earnings from life-insurance contracts and annuity contracts generally aren’t taxed until they are withdrawn. Life-insurance death benefits are generally exempt from federal income tax.
  8. Invest in rental real estate. Rental income is offset by depreciation deductions, reducing the amount of net investment income.
  9. Maximize deductible contributions to tax-favored retirement accounts such as 401(k) and self-employed SEP accounts
  10. If you are a cash basis self-employed individual or sole shareholder of an S-Corporation, consider accelerating business deductions into 2016 and deferral of business income into 2017.

Bottom-line, the NIIT is complex, and all strategies should be discussed with your tax and investment advisors before implementation to avoid other unintended tax consequences. Many of these strategies take time to implement as well, so start planning now. We can help you evaluate which strategies would be best for your particular situation, so give us a call soon to get started on your 2016 planning process.

Collections are the lifeblood of any medical or dental practice. But do you really know if you’re doing a good job of collecting receivables? Find out for sure by monitoring these three collections performance indicators:

1. Days in Accounts Receivable

To find out how long it takes to collect a day's worth of gross charges, add up the charges posted for a specific period of time and divide by the total number of days in that period. Then divide the total accounts receivable by the average daily charges. 

For instance, if you have charged $640,000 in the past 12 months, or 365 days, your average daily revenue is $1,753. Then, if your total accounts receivable today are $80,000, the days in accounts receivable is 45.6. That means it is taking an average of 45.6 days to collect your payments. Note that if this number is consistently high — or you notice a jump in the number of days outstanding from one month to the next — it could be sign of problems caused by anything from coding errors and incomplete documentation to claims rejections caused by patient registration errors. 

Recommendation: We recommend that you use a rolling average of 12 months of charges for this computation. The results will vary by specialty and payer mix, but a typical goal for days in accounts receivable is 35 to 40 days.  

Action: Determine how your practice’s days in accounts receivable compares with other practices using a source such as the Medical Group Management Association (MGMA) annual Cost Survey Report or Performance and Practices of Successful Medical Groups Report. 

2. Accounts over 90 days

The practice’s aging report, based on date of entry and NOT ”re-aged,” should be reviewed monthly. Obviously, the longer an account remains unpaid the higher the risk of it becoming uncollectable. So, it’s critical to measure the percent of your accounts receivable in each “aging bucket.” 

Recommendation: We recommend that you review a separate aging report for both insurance and patient receivables monthly, paying particular attention to outlier payers in the insurance aging report to spot any developing trends. Credit balances in accounts receivable should be investigated and manually added back to each aging “bucket” to get a clear picture of accounts receivable aging. An acceptable performance indicator would be to have no more than 15 to 20 percent total accounts receivable in the greater than 90 days category. Yet, the MGMA reports that better-performing practices show much lower percentages, typically in the range of 5 percent to 8 percent, depending on the specialty. 

Action: Consider establishing a target AR range for your practice. For example, you might shoot for having 60 percent of receivables fall into the 0-30 days bucket, 20 percent in 31-60 days, 5 percent each at 61-90 days and 91-120 days, and 10 percent falling over 120 days. 

3. Net Collection Percentage

This is the bottom-line number that reveals how successful you were in collecting the money you are entitled to collect. Add up your total collections and divide by adjusted charges (charges less contractual adjustments) to determine how much you have actually collected. For example, if your practice only collected $50 on a procedure contracted for $75, your net collection rate would be 67 percent (50 divided by 100 minus 25). 

Recommendation: We recommend that you use a rolling average of 12 months of net charges and receipts for this calculation. In general, a net collection percentage of 97 percent or higher will help ensure a healthy bottom line for the practice.

Action: If your net collection rate is lower than this, drill down and calculate the net collection rate by each of your payers to determine if the problem is coming from a particular source. If net collection percentage is consistently down across all of your payers, you’ll know that the problem is internal (e.g. your front-end billing process is resulting in rejected claims). 
 

Contact our office today for help in monitoring your practice’s collection performance.