Hy Smith, Founder of Professional Transitions

So, it’s another presidential election year. The rhetoric is filling the airwaves and the subjects most discussed are deficit and taxes. The Democrats want to let part of the Bush tax cuts expire and return to a 39% tax rate for earnings over $250,000 and the Republicans want to extend the Bush tax cuts for everyone.

Most economists acknowledge that spending is too high, but cutting spending alone will not reduce the deficit, suggesting that some additional tax dollars must be raised.
	
	So here we are with an impending election and rhetoric flying from the left and the right. Congress may still step in, but we can only look at the cards that are currently on the table and try to make decisions accordingly. With the Bush tax cuts ready to expire on January 1, 2013, there is no better time than now to consider some potential tax planning before it’s too late.
	
	In this current scenario, for the Bush tax cuts to expire for those earning more than $250,000 per year, certain actions could be taken this year to mitigate the additional taxes many dentists may owe. If your income for 2013 is expected to be above $250,000, you will be paying the old tax rate of 39% on all income over the $250,000 threshold. Discussing your options with a certified financial planner or CPA could save you significant additional taxes.  
	
	


	Section 179 of the IRS Code provides a rapid depreciation of $125,000 (on equipment purchases in 2012). This provision will be discontinued if the Bush tax cuts expire, and will  revert to a five or seven year depreciation schedule in 2013. Also, if you did not take advantage of the Section 179 depreciation schedule in 2011, which allowed for $250,000 of depreciation for equipment purchased in that year, you could amend your 2011 return to take advantage of that rapid depreciation and perhaps reduce your taxable income for that year. If you are considering significant capital equipment purchases, you may want to take advantage of the Section 179 rapid depreciation this year.


	Anyone having built or remodeled an office since 1997 could qualify for accelerated depreciation for certain building costs. In HCA v IRS, the court ruled that certain leasehold improvements specifically related to your profession can be depreciated over 5-7 years (instead of the normal 39½ years). Qualified leasehold improvements for a dental office would include plumbing (including nitrous or oxygen), special electrical or computer wiring into treatment rooms, special structural support (re-enforced for lighting and radiography), tile flooring, lead shielding, and more. To qualify for this tax provision, a “Cost  Segregation Study” must be made by a qualified person or firm, itemizing the specific costs to be depreciated.
	
	


	If the Bush tax cuts expire at the end of 2012, anyone 

 in 2013 and after will be paying almost 10% more in taxes on the goodwill portion of the sales price. So, for example, if you sell your practice for $800,000 in 2012, the amount of taxes you would pay would be $145,000 (assuming $675,000 as goodwill and $125,000 as ordinary income). In the same circumstance, if you sell your practice for $800,000 in 2013, the taxes you would pay would be just over $204,000 ($59,000 more!).  If you are planning on selling this year or next, waiting until next year could be costly!
	
	


	In this, we have not yet discussed the additional 3.8% Medicare tax on capital gains that was imposed by the healthcare reform legislation enacted in 2010. As of now, on January 1, 2013, an additional 3.8% Medicare tax is scheduled to be assessed on net investment income, including capital gains and investment income taxes. This increase will apply to single taxpayers with income over $200,000 and married taxpayers with a joint income over $250,000. Utilizing the same example as in the Capital Gains section, the $675,000 allocated to goodwill will cost you over $25,000 in additional taxes than without this provision. This 3.8% tax is independent of the extension of the previous tax cuts so even if they are extended, plan to pay an additional nearly four percent in taxes on capital gain / investment income (again, in this example, $25,000+).  
	
	These are just a few of the options you may have available to you in order to keep your tax bill in check. We are not offering tax advice, but merely pointing out some of the areas where tax savings might be realized. We highly recommend contacting your accountant and/or your financial planner to discuss all of the available options for maximizing your personal and professional financial positioning before the end of 2012 and beginning of 2013. Not only could you position yourself to save money now, and in the future, but the process of planning may shed light on even more and possibly better opportunities to save.

 and a thirty-five year plus veteran of practice transitions. Professional Transitions is a full-service firm providing comprehensive transition services for dentists from graduation to retirement. Its central focus is to assist clients in realizing lifetime personal, professional and financial goals in win-win-win-win (seller-buyer-staff-patient) structured transitions.  Hy, a resident of Naples, Florida for twenty years, now owns a home in Sarasota, Florida as well as southern Oregon. He received his MBA from the University of Utah. Hy has been consulting and brokering practices since 1974. He has presented many courses on practice management and practice transitions. He is a former president of ADS (formerly American Dental Sales), the director for Exit and Transition Strategy for the Pride Institute and the author of the Dental Practice Transitions Handbook.  Hy can be reached at 

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	As the country's economic recovery remains stagnated, at best, and with recent news that the poverty level in the US has increased yet again, it is easy to see that Americans continue to find themselves less able to afford dental insurance or pay for fee for service dentistry. 

	As children of the poor are quite often the victims of recession and unemployment, Medicaid was designed to provide the needed dental care for such children and qualified, disabled adults. It is not surprising now to see that Medicaid in dentistry is on the rise.

	Just this month, Dr. Hal Hale, President of the Kansas Dental Association stated that he is aggressively attempting to recruit additional providers of Medicaid to assist in the growing number of undertreated children in the State of Kansas, which is just one of many states that find itself trying to provide dental care to the needy. 

	But, before you jump on the Medicaid wagon with all of your altruistic, virtuous intentions, BEWARE of the potential consequences!

	Medicaid, though a federal government program, is administered by each state and the administration is and can be very different from state to state.  However, each state must follow the primary federal guidelines for its administration.  This process creates a bureaucratic nightmare in many instances.  The guidelines are published by each state and as many governmental documents are written, can be very difficult to read and understand.  But, understand them you must!

	Recently in South Texas six pediatric dentists and an oral surgeon were indicted by the United States Attorney for Medicaid fraud and Anti-kickback violations.  Not because they did anything intentionally fraudulent or with any intent to violate the rules, but because they did not follow the “Letter of the Law” when it came to understanding the regulations.  After over a year of litigation with the US Attorney’s office, and an actual trial, all were exonerated of wrong-doing.  The cost to each of these dentists in time, emotion and legal expenses was enormous. 

	Unfortunately, there are, in fact, those out there in dentistry and in medicine who have and continue to abuse the system.  This puts those legitimate providers in jeopardy of intense scrutiny by both state and federal investigators.

	The solution; read, understand and follow the regulations.  This is not an easy task as most state  Medicaid regulations consist of over one hundred pages of regulations and requirements that must be adhered to.  “The Florida Medicaid Dental Services Coverage and Limitations Handbook” (104 pages of regulations) by its very title indicates what to expect when you settle in to read the rules.

The most frequent violations of the Medicaid regulations fall into two categories: 

	First and most common are coding violations, defined as:  False Claims Act 31 U.S.C. §3729. False Claims, LIABILITY FOR CERTAIN ACTS:  Any person who:  1. Knowingly presents, or causes to be presented to an officer or employee of the United States Government…. a false or fraudulent claim for payment or approval; 2. Knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government; 

	Second, the Anti-kickback regulations found in what is commonly called the Stark Law, Title 42 U.S.C. 1395nn which makes it illegal for a dentist to receive any remuneration for referring a patient to another dentist. It was under this rule that the Texas pediatric dentists were indicted because they charged the oral surgeon rent for using their dental offices while he extracted third molars from their patients. Because there was no formal written lease agreement that identified the terms and conditions of the compensation paid to the pediatric dentists, they were charged with receiving a kickback from the oral surgeon.

	Because Medicaid is administered by the state, there will be state regulations and administrative functions as well as federal regulations and administrative functions. Depending on the state, these processes can be one and the same or piggy-backed on one another. There are also state and federal compliance requirements. The state's requirements may be less or more stringent than the federal requirements, but each and both must be met.  In other words, a dentist may be in compliance with the state Medicaid requirements and still in violation of the federal law.

	Setting aside all of the above, it is important to understand the impact on the value of a dental practice that participates in Medicaid. There are very successful Medicaid dental practices, especially in pediatric dentistry. If one understands the rules and complies with the law by making sure there is a specific protocol that is in place to provide Medicaid treatment, it can be a very successful business model.  However, more often than not, we see practices that mix Medicaid, capitation insurance, indemnity insurance and fee for service which creates a nightmare for the front desk due to the many different rules and payment schedules each plan has.  This is a recipe for disaster and ultimately will lead to billing mistakes that could be interpreted as fraudulent.

	Because very few purchasers want to buy a practice that has this built-in risk, the value of these practices is usually reduced significantly and in some cases, the risk renders them unsalable.

	In no way is there intent to discourage the dental community from participating in Medicaid programs, especially when the need is so great.  However, it is critical that those who choose to participate, understand the rules and the laws and abide by them

	For Coding, Dr. Charles Blair’s “Coding With Confidence” provides excellent coding guidelines. 

	For Medicaid rules for dentistry, see your state Medicaid Dental Provider Handbook.      

 As the country's economic recovery remains stagnated, at best, and with recent news that the poverty level in the US has increased yet again, it is easy to see that Americans continue to find themselves less able to afford dental insurance or pay for fee for service dentistry.   As children of the poor are quite often the victims of recession and unemployment, Medicaid was designed to provide the needed dental care for such children and qualified, disabled adults. It is not surprising now to see that Medicaid in dentistry is on the rise.

Beware of Medicaid nightmares

I recently attended a Transitions Seminar presented by a well known dental advisor. The presenter was an attorney and has spent a significant number of years dealing with dentists as well as with other professionals advising them on wealth management, practice management and transition strategies.

Most of what was presented was standard information related to planning and preparation for retirement, with suggestions on the necessary amounts needed for retirement and the related tax issues. One period of the presentation was also focused on determining the value of the dental practice as a component of the retirement portfolio.

Having been a member of the Institute of Business Appraisers for over twenty years, attending multiple American Society of Appraisers workshops and seminars and spending years associated with qualified and experienced appraisers that adhere to the Uniform Standard of Professional Appraisal Practice I was not only surprised, but severely disappointed at the totally unsupported approach used by this presenter in his dental practice appraisal example.

The premise was that a practice grossed $850,400 and had an adjusted net income of $360,000.  The valuator multiplied this net income figure by 150% (why?) then reduced the original cost of the equipment, furniture, fixtures and leasehold improvements by 1/12 per year of use (why?) then determined replacement value of supplies and 50% of cost of instruments (why?) to arrive at a value of the tangible assets. The next step taken was to assume a 20% loss of profit (based on what?) and then adding the adjusted profit to the adjusted tangible asset value to arrive at a practice value.

None of the above assumptions made has any basis in fact or theory. They are just numbers that have been pulled out of the air and applied to information provided by the seller. It is very easy to get the actual fair market value of the tangible assets by asking for an appraisal from an equipment/supply dealer. Determining the goodwill value requires more information as risk factors, such as; what are the economic issues in the area, how many new patients are being seen, is the practice increasing in revenue or decreasing, are key staff members staying in the practice, etc., are required to determine the goodwill.

The fatal flaw that discredited the entire valuation process was multiplying the net income by 150% to determine the goodwill. Where does that number come from?  All the numbers used to determine value must have a legitimate source, whether it is a capitalization rate used in the Capitalization of Earnings Approach, the comparables or “comps” that are used in the Market Approach or using an Earnings Approach based on present value of discounted future earnings. 

All of these approaches to value use very specific formulae and/or processes to reach a determination of value. Dr. Shannon Pratt, author of “Valuing Small Businesses and Professional Practices” outlines in very clear detail the methodologies that can and should be used in valuing a Professional practice, and in specific, dental practices.

It is very disturbing that the dentists present at the seminar listened to, and accepted the speaker’s approach, not knowing or being aware of the fundamental flaws that were presented. If, in fact, they used the model presented there would be little or no correlation to the actual value of their practice.

The best I can say for the approach presented was that it was a “rule of thumb”. We have all heard the rule of thumb that a practice is worth 60%, 70% or even 80% of gross. As a practical matter let’s take two practices, each grossing the $900,000 in the presenter’s example. Do they both have the same value if one has all new, state of the art equipment and the other has 20 year old equipment?  What if one is all fee for service and the other is all HMO? Are they equal in value? I would suggest not, but this presenter did not differentiate any of the issues that should go into a legitimate appraisal such as: stability of income, age and condition of equipment, fee schedules, amount of reduced fee dentistry in the practice, procedures performed, source and number of new patients, etc.  All of these conditions and several more must be assessed and evaluated to determine the health and value of a practice.

It is not just this presenter that creates an unacceptable method for appraising practices, but just this week I spoke to a dentist in Michigan that had approached a general business appraiser to appraise her dental practice.  In reviewing this appraiser’s web site, once again, there were no credentials supporting his ability to value dental practices, yet contrary to all the standards in the appraisal practice, he was going to accept the assignment and do the appraisal.  One of the fundamental rules of appraising is that you do not accept assignments outside of your expertise, yet I see it all the time. 

Having an updated appraisal is incredibly important for your practice. Not just for financial/retirement planning, but further as an aid in the case that you, the dentist, were ever impaired such that you were not able to practice (disability or even death). Beyond that, just for the point of knowledge, it is important as, most often, your practice is the 

 asset you own! That said, an appraisal is not an inexpensive undertaking and if done improperly, can either give you unrealistic expectations as to what you can sell your practice for, or cost you severely if undervalued.

There are very specific, acceptable methods of valuation established by the Uniform Standard of Professional Appraisal Practice  and adhered to by the appraisal community and accepted by the court systems and the banking institutions that provide financing to those purchasing dental practices. The old standby is still sound advice: Caveat emptor! Buyer Beware! Make sure the person or firm you choose to do your appraisal is qualified to do dental practice appraisals.  Interview and examine the credentials of those you engage to perform this very important element of your transition process.  

Hy Smith, is the founder of Professional Transitions, Inc and a thirty-five year plus veteran of practice transitions.  Professional Transitions is a full-service firm providing comprehensive transition services for dentists from graduation to retirement.  The central focus and purpose its to assist clients in realizing lifetime personal, professional and financial goals in win-win-win-win (seller-buyer-staff-patient) structured transitions. Hy, a resident of Naples, Florida for twenty years, now owns a home in Sarasota, Florida as well as southern Oregon. He received his MBA from the University of Utah. Hy has been consulting and brokering practices since 1974. He has presented many courses on practice management and practice transitions. He is a former president of ADS (formerly American Dental Sales), the director for Exit and Transition Strategy for the Pride Institute and the author of the Dental Practice Transitions Handbook. Hy can be reached at 