Tax Strategies For The Private Practice Owner With Eric Miller Of Econologics

[00:00:00] It is a duty and responsibility that every practice owner should have is to try to minimize their tax liability. It's good for you, it's good for your practice, it's good for your household, it's good for everything.

[00:00:13] Welcome! You've entered the Physical Therapy Owners Club podcast where your host Nathan Shields and other successful PT owners and leaders share their experience and insights on how to build successful PT businesses. They'll share the stories of their paths to success and show you how

[00:00:29] you can also obtain greater freedom and more profits from your business. That's what the PT Owners Club is all about, greater freedom and more profits. There's plenty of room for you as well,

[00:00:39] so come on in and join the club. Hello and welcome to the Physical Therapy Owners Club podcast. I'm your host Nathan Shields and I've got frequent flyer and guest Eric Miller, Chief Financial Advisor at Econologics. Hey it's been a while man but it's a new year.

[00:00:58] We're getting started off. Am I like a platinum member? Am I like a gold member? You're racking up a ton of points here bro. I don't know if it gets you in any special lounges or

[00:01:07] anything but you can stay in my house when you come up to Alaska next time. Take what I can get. It's cool to have you on. Of course, if you have been a listener to the podcast you've

[00:01:18] heard Eric a ton of times talking about financial scenarios related to private practice. Today I was inspired. Before we jump into the next episode let's talk about something I think we'd all

[00:01:34] like a little more of and that is money. As a PT owner I know how hard it is to increase your revenue without spending more on marketing or trying to attract a flood of new patients

[00:01:45] and let's face it you're already stretched thin trying to run your clinics but what if there was a proven way to increase your revenue 10% in just 30 days with minimal effort? Better yet how could you use the additional revenue in your business? Maybe you could hire another PT,

[00:02:00] you could start saving to open a new location or my personal favorite invest in yourself by hiring a business coach. Regardless of how you choose to spend at a 10% bump in revenue can

[00:02:11] have a huge impact on your business and that's why I created How To Increase Your Revenue 10% within 30 days. A free guide to help you boost your clinic's revenue and see big changes to your bottom line by tracking just one simple statistic in your business. And here's my big

[00:02:26] promise when you follow the three steps I lay out in the guide you're going to see up to a 10% increase in revenue in 30 days. This revenue boosting strategy is the same one I teach inside my

[00:02:39] one-on-one coaching program for PT owners but it's my gift to you just for being a listener to the show. So head over to ptoclub.com to download your free copy of How To Increase Your Revenue 10%

[00:02:52] within 30 days and again that's ptoclub.com. After you download it and implement it feel free to reach out to me schedule an appointment with me on the same website, schedule an appointment

[00:03:05] with Nathan and let me know how it went and we can talk about next steps. That's ptoclub.com To talk about tax strategies because someone in my coaching group mentioned it on Slack or

[00:03:24] something like that about hey, it'd be nice if we had someone come talk to us about tax strategies, avoidance, shelters, etc. whatever you want to call it and so I thought, Brett, I've never had that conversation with Eric so why not bring you on and talk about that?

[00:03:40] Yeah, let's knock it out man. I love it. It is an important subject. You look at the amount that practice owners pay in taxes. I like to call it probably one of their top three expenses

[00:03:52] that you have is the tax bill so it's definitely something that you should be aware of and know about and have some kind of a strategy to minimize it. Yeah, the way you and predecessor talked

[00:04:05] about taxes was I thought was cool because yeah, it's important the mindset that you have around it. I appreciate and that is why avoid make as much money as you can. It shouldn't be a shame to pay a

[00:04:17] lot of taxes because that means you made a ton of money but also the tax code is essentially a way of telling you this is how you avoid paying taxes. Just follow our code so it's

[00:04:29] not cheating. It's just follow the code they tell you how to avoid paying taxes. Just follow that. Yeah, I mean there's a couple terms I think people need to there is a difference

[00:04:39] between tax evasion and that is the illegal practice of trying to hide money and say you own like a business and someone pays you in cash and then you don't even claim that you made that money.

[00:04:52] That's tax evasion somehow cheating and some method there. You don't want to do that. Obviously, it's just not worth it. It's going to come back to bite you at some point in time

[00:05:01] because their bad deeds always seem to be what the strategy you want to implement is tax avoidance and that's just that's illegal practice of avoiding to pay tax based upon legal methods and means. I don't read anywhere in any government document or in the Constitution where it's my

[00:05:21] obligation as a citizen to max fund the IRS. You don't have to do that so it is a duty and responsibility that every practice owner should have is to try to minimize their tax liability.

[00:05:32] It's good for you. It's good for your practice. It's good for your household. It's good for everything. I think for those relatively new business owners, it's important to have a particular mindset and we've talked about it before on this podcast I know but we're talking about,

[00:05:47] I think we talked about it four years ago when the pandemic was going on or but you brought it up before we got on before we push record and that is make sure you are prepared and have accounts set aside for taxes and a separate account. Don't just

[00:06:03] commingle your funds amongst the general ledger. Talk to me about that a little bit. Yeah so this happens and it just happened and it'll happen again in the next few months is where someone calls up and it's April 15th and their accountant says, hey congratulations you had

[00:06:19] an awesome year. You owe $75,000 in tax and the person's charges drops and a bit of their stomach goes in the places you probably don't want to know about and it's unnecessary because look the business does give you a tax liability personally because

[00:06:41] the profit of the business then transfers over to your personal and then you owe the tax on the profit right. So it's incumbent upon every owner to realize that when I'm factoring in my

[00:06:55] make break number or how I manage the money of the business I have to set aside a certain part of the revenue to go into a tax account. Now how much is that is good a very you could have a year

[00:07:07] where you do a build out and or have like huge expenses and your tax liability is not that big so it's going to vary what percentage it is but that's the thing where you really have to have a

[00:07:19] develop a cadence with your CPA where you guys are meeting every quarter. Yeah and saying like where okay here's our profit and loss so far this year what is what am I looking at as far as

[00:07:31] taxes are concerned or what percentage should I start setting aside. So before we start looking at deductions or anything like that you really have to just set up the some systems so that

[00:07:41] you make sure like you don't have a surprise that you're setting aside money to pay for your tax and then from there we can try to whittle that number down so you don't know it all but I think

[00:07:52] being prepared for it is really important. It's just as simple as having a tax account. You can just own it can be a business account or a personal account really doesn't matter. Yeah

[00:08:00] just have it just designated as there and just have money go in there so. Yeah I've been on the other side of that phone call in the past and there were a lot of emotions going on

[00:08:11] and that was difficult to swallow. After it happened the second time I was like okay the fact that it happened a second time was completely my fault and not the CPA's fault and I said this is

[00:08:21] never going to happen again so we're going to have some more communication you're going to teach me we're going to meet more often we're going to have these conversations about okay what is my

[00:08:30] tax liability look like at the at the end of this year and we would talk about it every quarter at a minimum make sure I have so much money set aside and he'd project based on last year's

[00:08:40] numbers and this year's numbers this is where I think it's going to fall so you can set that aside so I highly recommend that that's great advice what would you recommend also in terms

[00:08:50] of owners taking salaries and the tax benefits of that well I think for the majority of PT owners you're probably going to be set up as an S corp of some kind or an LLC tax as an S corp so

[00:09:02] that allows you to take money out of the practice in a few ways number one you can pay yourself a W2 salary which I think most people do for their quote-unquote practitioner role that they

[00:09:14] play now if they're not what would you tell them if they're not a practitioner no if they're not taking a salary there there's plenty of small business owners out there that aren't taking

[00:09:24] salaries yeah be careful because you're probably going to be in in violation of this if it's necessarily a rule but you do have to pay yourself what's called a reasonable compensation

[00:09:36] that goes yeah that's there you go the IRS of course they're trying to be clear as mud what's reasonable compensation and that basically would mean like how much would you have to pay someone

[00:09:49] else to do the functions that you're doing in your position so you know for a PT what is that that could be anywhere between 60 and 100 thousand dollars that you would probably you'd probably

[00:10:00] want to pay yourself and take the low end if you can yeah and try to take the low end if you can and that would be considered a reasonable compensation now if you're paying yourself 10 thousand dollars in salary and you're taking out everything else in profit distributions that's

[00:10:14] probably going to I don't want to say it'd be a red flag but that will that would probably get you into some hot water if you did that so I would just take the reasonable compensation

[00:10:27] I see a lot of CPA say that the amount that you pay yourself in salary has to be dead even with the amount of profit distributions like those have to be even yeah and I'm like that I've never

[00:10:38] read where it says that so you can it's not true exactly so you know if you have a really successful practice pay yourself 60 thousand dollars in W2 and you want to take out 200 thousand dollars in draws profit distributions totally do that that's there's nothing wrong with that

[00:10:53] you just would eliminate the extra FICA tax that you would have to pay if you had a bigger W2 so what is the tax advantage to taking a salary aren't the tax rates different for your

[00:11:03] salary wage versus your distributions I don't know if that's going to affect your overall tax rate but definitely would affect so the FICA tax yeah you don't get FICA tax on your distribution on the distributions yes so there is a small tax advantage there

[00:11:19] yeah there's definitely a tax advantage in doing that yeah so I would say that's probably the one thing you could do is how you classify the compensation that you have try

[00:11:27] to take out more profit distributions and the minimum that you can do in W2's okay got you sorry I got on a tangent there no that was good I think that's an important because I've seen a lot

[00:11:38] of people that take really big salaries and I'm like why are you taking such a big salary oh and they're and I was a good how much would it save them let's say they're taking like 200 000

[00:11:45] dollars in salary do the other way around that's probably five to seven thousand dollars of tax that they're paying that they don't have to you know by doing that not every tax

[00:11:55] seduction is going to be this huge amount of 30 or 40 000 but it all adds up I would say most people are probably overpaying by about 20 to 25 000 a year which is pretty crazy when you think about that

[00:12:07] I'd take an extra 20k yeah another you may go through a couple more yeah let's hear it another one of course that I think is eligible for most people that have a health insurance a high

[00:12:18] deductible health insurance plan would be a health savings account that's another method that you can put I think the for a family this year I think it was 8700 that you can put a year yeah

[00:12:30] again you're taking money that you otherwise would have had to pay tax on this is pre-tax money that can go to the HSA right yes but as long as the money is spent on medical you don't have to pay

[00:12:42] any tax when you take it out which is like if you get like a triple whammy of tax benefits on the health savings accounts I'm a big fan of the health savings account because I think it's

[00:12:51] something that not a lot of people are taking advantage of and it's a great way to pay for health care costs and such geez what else can we go on how does the august a role affect private

[00:13:00] practitioners and how strict do people need to be regarding that and having home offices yeah so I think the august a role is a so just to go back on that's basically a method where you can

[00:13:14] rent your home for up to 14 days per year and without being charged any tax on that okay so the business can pay you for renting out your home 14 days per year so if you lived on a golf course

[00:13:30] which is where it came from those guys are renting out their homes for $10,000 a day for 14 days and it's all that money they're getting is tax-free $140,000 a year of tax-free income

[00:13:43] so then you're like thinking great but Eric I don't have a house on a golf course but you do have a business if you have like employee meetings or officer meetings or something like that where

[00:13:55] maybe you guys go to a hotel or a restaurant just go to your home basically do the same thing in the business then would pay the pay you for the access to the house and now how much can

[00:14:08] you do again this is where you're going to have to talk with your CPA and make it so like I wouldn't do like $5,000 every time you have a meeting you're probably going to be

[00:14:16] unless you have a ton of employees but why not a thousand bucks and again there's a thousand dollars that you're paying to yourself it's a deduction for the business 14,000 a year it adds up same with putting your kids on the payroll which I think another

[00:14:30] is a lot of people have done before as well you can put your kids on the payroll I think six years old is the minimum age that you can have them be on the payroll and is it

[00:14:40] going to be a huge amount of money no but I mean up to 10-12,000 dollars maybe depending on what they're doing there's a limit right on how much you can pay your kid I think it's well

[00:14:50] before they start getting into the FICA tax yeah I think it's up to 12,000 somewhere around there yeah but again you can okay so then they do some work now they got to do some legitimate

[00:15:03] work I would have my kids if we like printed newsletters they would fold the newsletters they'd put stamps on the envelopes and stuff like that yeah and then you can take that money and put it into an account for them maybe open up a Roth IRA for them

[00:15:16] and make a contribution there all of this is tax-free for them oh that's tax-free for them and they can just do that and all of a sudden that builds up over time for them and it's awesome

[00:15:26] I think another big one too for a lot of practice owners that own your buildings would be the accelerated depreciation of that building the technical term I think is called cost segregation you ever heard of that before in essence what happens is let's say that you bought

[00:15:44] like a two million dollar building or a million and a half dollar building but you get a depreciation expense every single year and I think it's spread over like a 39 year period somewhere around there

[00:15:56] so they take a million and a half divided by 39 and that's your expense that you get every single year for 39 years yes you get the right off great that's a great expense

[00:16:09] but damn why does it take so long 39 years for me to get that entire amount yeah are you really going to hold it that long exactly so what basically you can have done is you can have

[00:16:21] some kind of an engineering group come in and do a an analysis of the building because the building is made up of windows and floors and roofs and not all of these they have different

[00:16:33] classifications of how you can depreciate these things so instead of taking 39 years maybe you can get most of the depreciation in one to five years now that's massive and there are times

[00:16:49] where we just had a client that did that and he basically didn't have a tax bill for a year or two because of that and you know how important that is when you're running your business to like

[00:17:01] maximize the cash flow it's the same amount you're not getting an extra deduction you're just taking it sooner accelerating it and it's the time value of money like I can do better things with that money now instead of waiting for 39 years to do it I think that's

[00:17:18] a really powerful one that not a lot of people you can apply that on if you do a big build out you can do a cost segregation on that as well so it's not just on a building but that's a really

[00:17:27] powerful one you just said something there if you don't own the building and you do a bunch of TI can you is that also can that be cost segregated pretty sure that you can accelerate that as

[00:17:39] well so again these are all things that are like now that's a that can be a really sizeable one for a practice owner that's something that I've talked to my CPA about and he said listen

[00:17:49] it's a good idea number one number two you want to do it sometime I think in the first like five to seven years that you own the business to make it worth it or that you own the property and number

[00:18:00] three you want to do it especially when you have a high income year so if you know your tax bill is going to be large that's the time to get your cost segregation and it's a really

[00:18:10] cool quote-unquote secret out there I think because I know there's a lot of real estate investors that they've told me I don't need to make more money on real estate but I continue to buy more

[00:18:21] properties simply to get the cost segregation benefits in my taxes so they don't have to pay taxes next year and these are guys that have tons of cash flow and they aren't paying taxes because

[00:18:31] they're using this strategy yeah it's pretty amazing this is probably the most this is a benefit of owning real estate of course is that you can do just that so take advantage of

[00:18:42] it I mean it's it is something that I think a lot of practice owners aspire to most most practice owners and it makes good sense to want to own your locations so that you can keep the real

[00:18:52] estate and just rent them out at some point in time so it's going to be part of your wealth building strategy anyway and it's not just as an income source but it can be a great tax

[00:19:02] benefit as well. So it's often said that you can write off a portion of your mortgage if you're using office space in your home is that also recommended like writing off the

[00:19:16] Wi-Fi at your home or maybe your cell phone and that kind of stuff and some of the personal things is that or is that kind of dicey? I think again that CPAs get information that says

[00:19:30] this is a quote unquote red flag and most of them once they hear that say oh don't do that because that without looking at the actual situation and saying let's see if we can work this out

[00:19:44] because maybe you guys set up some kind of a management company or maybe you there's a legitimate way where you can take the home office deduction it's obviously highly people look at say oh no

[00:19:55] you're going to get audited by doing that and you're just like okay show me why I just just ask them show me why if this is if we're doing it per the letter of the law then why shouldn't

[00:20:05] we be able to do it and I find that with a lot of some of these advanced tax strategies there's a couple that we're looking at right now have been scrutinized obviously because people abuse them

[00:20:17] I'll give you one example one's called the 831B plan you probably heard the term like captive insurance company this is where okay so basically 831B of the tax code talks about how you can

[00:20:32] actually set up your own separate business quote unquote insurance company that would fill in gaps of risk that you have in owning the business that you don't have insurance for right now I think a couple of examples would be like brand risk most people don't really have insurance

[00:20:53] in case someone tries to attack their business brand or something like that but it is an insurable thing yeah absolutely and again you have to go through very legitimate companies to be able

[00:21:05] to take advantage of these things make sure that these are set up correctly make sure that money is being diverted but stay with me here if you have a big profit year okay you can actually

[00:21:15] take a portion of that profit and then divert it to a separate company that you own that basically is acting like your own insurance company or reinsurance company and the selling insurance companies were formed basically companies were like what we have these risks and

[00:21:32] let's usually utilize the tax code to take profits off and not have to pay tax on them we divert them over as an expense to our insurance company that we own separately from our regular business

[00:21:44] and we get the benefit of the tax deduction here and now we have money growing over here separately and that's what they call a captive insurance company because it's captive it's owned by obviously the separate business but that was always off limits to PT owners are like oh

[00:22:01] geez I don't make that kind of money I'm not going to be able to divert a million dollars of profit over to that something but now you can do with like 50,000 somewhere around there where maybe some

[00:22:11] people do have pretty profitable businesses they could do that it's called 831B you have to go through a legitimate company to be able to do it but yeah we've had come we've had people that have done this and they've diverted to 150-200 thousand dollars money that they otherwise

[00:22:25] would have had to pay 40% profit on because they live in the great state of California in New York and they transferred that over into their own reinsurance company with legitimate risks that this company is ensuring for their business and it's a win-win. That money accumulates and then

[00:22:41] what are you able to do with that money over time? So generally it will sit there and you can invest it now it's got to be based usually some kind of fairly secure investments could

[00:22:52] be treasury bills or in combination of stocks bonds whatever that would be and it just accumulates and then once you sell the business you no longer need the insurance company anymore

[00:23:04] so now you got to pay tax on the sale of whatever you have in there but it's at a lower tax rates at capital gains tax rates as opposed to ordinary income and again these are all

[00:23:15] things that are legitimate in the tax code but not a lot of CPAs probably talk to their people about that. I have to tell coaching clients and friends and family that you can't

[00:23:25] expect your CPA to know to give you ideas on the tax code those CPAs are you and far between but when you come at them with these ideas they're like yeah you can do that okay why didn't you

[00:23:38] tell me dude? They might be a little bit they might hedge a little bit because they're not clear on the tax code or like you said they might have someone at some time might have said

[00:23:47] oh that's a red flag you don't want to do that but you're not sure why so as you press them they might not be able to explain but you can't what I'm trying to say is you can't rely on your CPA

[00:23:57] to naturally bring these up as opportunities for you to say save on taxes but when you do they're like okay yeah I can help you with that. Yeah I think most of them want to

[00:24:08] say I don't know if their goal is to save you on taxes I think for the most part they just want to make sure that you don't get in trouble they want to make sure that you're

[00:24:18] compliant and you file your taxes on time and it's a few and far between that really someone goes out there because I mean we had to look up all this stuff try to find out because everyone comes to us

[00:24:29] as financial advisors and saying my account's not helping me with my tax liability how do we do this and I'm like I don't know I guess let's just go find out try to look and say 10 15 20

[00:24:39] different deductions that you could take in combination with maybe a qualified plan that you have set up 401k simple or something like that which again there's another legitimate tax deduction. You didn't even talk about those. No that's I think most yeah most people probably

[00:24:53] have those and again there's nothing wrong with diverting a portion of your money into those as well but you just can't do one or two things it's got to be a combination of all these things

[00:25:04] that I think the home office deduction the rental of your home paying your kids a cost segregation even travel try to tie in travel where maybe you're doing something for a business maybe you

[00:25:17] try to travel on a Thursday and then go home on a Monday or you have a business meeting in between there and then you can write off a portion of the weekend wherever you're

[00:25:26] staying like that these are all things that I think you can do to help minimize your tax liability. My brother's tax strategy is to put everything on his business everything

[00:25:38] and then let it work out in the end I don't know if that's the best strategy but he's got a better mindset than some. Who knows? It all depends on what he would I mean I there's some people

[00:25:49] that like go to the extreme they're like say they bought like a bike or something like that and they put like their office decals on their bike and they're like I'm just promoting the

[00:25:59] business so they rode off the cost of the bike some people go to extremes think you need to go to extremes but you certainly shouldn't pay the amounts that most people are paying right now.

[00:26:10] Since you brought it up tell me about cars what can you do to write off car payments or your car how do you recommend that? A little outside of my knowledge at this point I know that there

[00:26:22] is a lot of people do put their cars either they put it under the they buy it under the LLC or they put lease they lease it and lease payments go from the LLC. Yeah there's a certain

[00:26:34] requirement that I'd have to look up to see whether or not I personally don't we don't do that yeah we don't do that but again I'm not driving around very much where I would legitimately be able to

[00:26:46] say that I'm using my car for other things besides a commute. Yeah I think that's the hard part if it's simply the commute you can't necessarily write it off maybe if you're driving between

[00:26:57] clinics during the course of the week because you have multiple clinics. Yeah if you got multiple locations and you're doing it that you probably have a better chance of making that a legitimate

[00:27:06] method of having to write off your car but just saying that I'm gonna drive back and forth to work but I'm gonna put the car and write it off that's probably not gonna fly of course I've seen

[00:27:15] a lot of people do that they don't care it's not to say they're doing it right but they are doing it. Yeah yeah I think the simplicity is and then there's even more I mean there's some of like

[00:27:27] deep advanced strategies of what a couple I've seen here recently of you can invest in these mineral mines and there's a appraisal done you just invest as like a limited partner and you get let's say I put $50,000 in and then there's an appraisal done on this

[00:27:45] and you end up getting back let's say a four times what your investment is so I put in $50,000 but I get a $200,000 deduction charitable deduction. Yeah you don't get the cash you get the deduction

[00:27:57] he's right your money's gone that more than offsets what I would have had to pay in tax anyways there's things like that again the tax code says what it says about these things what's

[00:28:06] your stomach for risk you've seen a lot of people do some of these things and some of it's worked out and some of it doesn't. What kind of legal disclaimer do we need to put on this episode?

[00:28:15] I think we should probably just say right now that neither Nate nor myself Eric Miller are CPAs you should make sure that you go and speak with your CPA before implementing any of the things

[00:28:29] that we talked to you today about all right or as we are not legal accountants or anything like that so that's our disclosure right there old disclosure. Amen if you want to talk to you

[00:28:39] a little bit more about it how do they get in touch with you? Yeah like do you have a PDF of this or you're going to create one? I'm gonna try to create something right here and I want to give

[00:28:48] everyone number one like what you should I'm trying to work this through like what a good product would be for people when it comes to this I think first and foremost how to manage making sure

[00:28:58] that you're setting aside money for your taxes the frequency of how often you should meet with your CPA what you guys should go over and should be looking at and then maybe 15 to 20

[00:29:10] different deductions that are available to you that you guys can take. That'd be huge. Yeah and I think that would be a good product for most people to have. Definitely cool yeah but in the

[00:29:20] meantime they can just go to connellogix.com we got all other kinds of cool downloads as well. Oh yeah you've got all the PDFs from prior downloads that you've referenced in the past

[00:29:29] as well so plenty of good material there. Hey thanks for joining me again today. All right buddy good to see you man. It's always good. Yep that was fun. All right see you man. All right.