Jacob Courtright, Author at Whalen & Company, CPAs

Inheriting stock or other assets? You’ll receive a favorable “stepped-up basis”

Jacob Courtright on July 11, 2023

If you’re planning your estate or you’ve recently inherited assets, you may be unsure of the “cost” (or “basis”) for tax purposes.

How do the rules work?

Under the current fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property equal to its date-of-death value. So, for example, if your grandfather bought stock in 1940 for $600 and it’s worth $1 million at his death, the basis is stepped up to $1 million in the hands of your grandfather’s heirs — and all of that gain escapes federal income tax.

The fair market value basis rules apply to inherited property that’s includible in the deceased’s gross estate, and those rules also apply to property inherited from foreign persons who aren’t subject to U.S. estate tax. It doesn’t matter if a federal estate tax return is filed. The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased but not the portion of jointly-held property that the inheriting taxpayer owned before his or her inheritance. The fair market value basis rules also don’t apply to reinvestments of estate assets by fiduciaries.

What if assets are given before death?

It’s crucial to understand the current fair market value basis rules so that you don’t pay more tax than you’re legally required to.

For example, in the above example, if your grandfather decides to make a gift of the stock during his lifetime (rather than passing it on when he dies), the “step-up” in basis (from $600 to $1 million) would be lost. Property that has gone up in value acquired by gift is subject to the “carryover” basis rules. That means the person receiving the gift takes the same basis the donor had in it ($600 in this example), plus a portion of any gift tax the donor pays on the gift.

A “step-down” occurs if someone dies owning property that has declined in value. In that case, the basis is lowered to the date-of-death value. Proper planning calls for seeking to avoid this loss of basis. Giving the property away before death won’t preserve the basis. That’s because when property that has gone down in value is the subject of a gift, the person receiving the gift must take the date of gift value as his basis (for purposes of determining his or her loss on a later sale). Therefore, a good strategy for a property that has declined in value is for the owner to sell it before death so he or she can enjoy the tax benefits of the loss.

Need help with estate planning and taxes?

These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. Contact us for tax assistance when estate planning and taxes as they relate to inheritances.

Navigating Dental Practice Acquisition

Jacob Courtright on July 11, 2023

Determining a game plan for buying your dental practice is the first step to successfully starting this phase of your career. It may be tempting to locate an office and begin negotiations; however, this approach will likely cause unnecessary stress and unwanted mistakes. The suggestions below can help you make solid business choices and keep you on track for a successful purchase.

1. Find out where you stand financially.

Graduating with significant student loan debt is common among dentists. Statistics show that 83% of dentists used student loans to pay for school and that the average dental graduate owes $293,900 upon graduation (ASDA, 2022). These staggering numbers impact the practitioner’s choice of career path. Before beginning the path to ownership, closely examine your debt package. It may be wise to defer the purchase of a practice until you have a repayment plan that works for your income. If you know and manage your debt early, you will be better positioned to purchase quickly.

2. Locate good advisors early.

Dental graduates often report that they need more business training. Their more experienced colleagues would likely agree. It is a common mistake to presume your dental skills will make you proficient at running a business. Find strong and professional business advisors to help you set up a budget and a business plan. A CPA can help you determine the best type of business entity for your endeavor and help with the budget and business plan. They can also direct you to trusted business professionals to assist with funding and legal issues. Find an advisor who is qualified and willing to help you every step of the way. You want to avoid choosing someone to do your taxes; find a partner to guide you into success.

3. Find a practice broker to help you locate an office.

You may have a setting that you envision for your practice. A practice broker can help you locate sellers in that type of setting. Location is a crucial ingredient to successful operations. Avoid markets that are saturated with dentists already. If you are inexperienced, you will likely have difficulty competing with established practices, assuming they are well-respected. Also, avoid the common problem of eliminating practices for consideration because they only fulfill some items on your wish list. Be willing to look at practices with an open mind and listen to what your broker and financial advisors say about the business.

4. Study the practice financials carefully.

After you locate a practice that suits your requirements, review the last two to three years of the business’s financial statements with your CPA and broker. Evaluating tax returns, patient numbers, production, recall efficacy, and collections over the chosen periods is critical. Your financial advisors can explain how this practice compares to national benchmarks. The seller has an emotional connection with the company that may influence the selling price. Some sellers will negotiate the price, while others may resist changing the asking price. Do not fall in love with the practice until you determine if it is worth purchasing and within your designated budget.

5. Make sure you list all items that are part of the purchase price.

Does your purchase price include items other than the equipment, building, or goodwill? Remember that the real estate purchase or lease is separate from the business purchase. You will need an attorney to help protect you in the contracts that are developed.

Some sellers will want to retain the accounts receivable, while others sell them with the practice. Some sellers may have items that need to be excluded, such as supplies or specific equipment or furnishings. Ensure you understand what you own after the sale.

6. Set up a contract that includes not just the particulars of the sale but also discusses how the transition will proceed.

Be sure that your contract with the seller addresses particulars about how long the previous owner will remain after the sale of the practice, who will be responsible for lab bills for finishing work, and hours during which the leaving dentist may access the office to complete remaining cases. If the selling dentist is not going to finish work, such as orthodontic cases, discuss how the case will transfer to you. Be sure to include verbiage outlining restrictive covenants so the owner does not set up a new dental practice within reasonable proximity and make your purchase valueless.

Patients may bond more easily if introduced to the new owner as they come into the office over six months to one year. Finding a seller willing to make the transition successful for you and the patients is prudent. Regardless, be prepared for some patients to leave the practice and for new patients to arrive when they see changes to signage and other indicators of new ownership. Goodwill is impossible to quantitate, although it is part of most dental practice sales.

7. Make sure you have an effective staffing transition plan.

Staff members are heavily involved in what happens at the sale of a practice. Many team members have only worked with the previous owner and may have reservations about a new dentist’s fit for the office. While they cannot thwart the sale, it is essential to help them understand their role in the new owner’s dental practice as soon as appropriate. After the staff is aware of the deal, keep the lines of communication open so they can have their questions about future employment answered and envision how their day-to-day tasks will be affected.

Following these tips will help you make a smooth transition into your new role as a business owner.

Laurie A. Morgan M.S., D.D.S., M.Ed

Healthcare and Dental Services Consultant

Supplement your financial statements with timely flash reports

Jacob Courtright on July 10, 2023

Timely financial information is critical to a successful business or nonprofit organization. In today’s dynamic marketplace, you may need to act fast to ward off potential threats and risks — and jump on new opportunities. But if you wait until your financial statements are released to react, you’ll likely miss out. Flash reports can provide real-time data that can help management respond to changing conditions.

Potential benefits

U.S. Generally Accepted Accounting Principles (GAAP) are considered by many people to be the gold standard in financial reporting. However, the process is complicated, so accounting departments usually take two to six weeks to send out GAAP financials. It takes even longer if an outside accountant reviews or audits the financial statements. Plus, most organizations only publish financial statements monthly or quarterly.

By comparison, weekly flash reports typically provide a snapshot of key financial figures, such as cash balances, receivables aging, collections, and payroll. Some metrics might even be tracked daily — including sales, shipments, and deposits. This is especially critical during seasonal peaks or among distressed borrowers.

Effective flash reports are simple and comparative. Those that take longer than an hour to prepare or use more than one sheet of paper are too complex. Comparative flash reports identify patterns from week to week — or deviations from the budget that may need corrective action. Graphs and tables can help nonfinancial people who receive flash reports interpret them quickly.

Critical limitations

Flash reports can help management proactively identify and respond to problems and weaknesses. But they have limitations that management should recognize to avoid misuse.

Most important, flash reports provide a rough measure of performance and are seldom completely accurate. It’s also common for items such as cash balances and collections to ebb and flow throughout the month, depending on billing cycles.

Companies generally use flash reports internally. They’re rarely shared with creditors and franchisors, unless required in bankruptcy or by the franchise agreement. A lender also may ask for flash reports if a borrower fails to meet liquidity, profitability, and leverage covenants.

If shared flash reports deviate from what’s subsequently reported on GAAP financial statements, stakeholders may wonder if management exaggerated results on flash reports or is simply untrained in financial reporting matters. If you need to share flash reports, consider adding a disclaimer that the results are preliminary, may contain errors or omissions, and haven’t been prepared in accordance with GAAP.

Tailoring the report

What information should be included on your organization’s flash report? This is a common question, but there isn’t a universal template that works for everyone. For instance, a consulting firm might focus on billable hours, a hospital might analyze the number of beds occupied, and a manufacturer might want to know about machine utilization rates. We can help you figure out what items matter most in your industry and how to create effective flash reports for your needs.

Choosing Your Path to Practice Ownership: Buying vs. Starting Up – Making the Right Choice

Jacob Courtright on July 7, 2023

As you embark on your professional journey, one important decision awaits you: Should you buy an existing practice or start your own? In this blog, we’ll explore the key factors to consider when making this decision, helping you navigate the path to practice ownership with confidence.

Assessing Your Goals and Vision:

Define your long-term professional goals and vision for your practice.
Consider your desired level of autonomy, flexibility, and control over the practice.
Evaluate your risk tolerance and financial aspirations.

Start-up, if you want to

Practice in a particular location or serve a targeted market.
Design the oﬃce space and brand.
Choose your own equipment, systems, and staﬀ.
Crave the challenge of growing practice in your own style.

Additional considerations before setting up an oﬃce:

Be sure your skill set is suﬃcient. You will need to be comfortable working solo. Be sure your quality and speed of dental services will be suﬃcient to be successful.
Identify your trusted advisors. You must locate a banker, accountant, and attorney prior to beginning the start-up. Business advice early and often can prevent regrets down the road.
Develop a solid business plan that encompasses all aspects of practice. Banks will require you to have a prospectus that outlines your demographic study of the location and population, your plans for marketing the practice, and your work strategy and abilities.
Make sure you are ready to spend more time than a normal workday during the early years. It takes a lot of eﬀort to establish policies and procedures, secure compliance in all the diﬀerent areas of business and practice, train staﬀ, keep up with purchasing, etc. If you have life situations, such as an inﬁrm parent or a new marriage or baby, starting a business can add additional complications to an already full life.
Evaluate your business every day. Are your plans succeeding? What needs to change? Goals are not enough to ensure a successful venture. Actionable feedback from your advisors will keep you on track to succeed.

Buy, if you want to

Rely on existing oﬃce infrastructure, equipment, and staﬀ.
Generate revenue more quickly.
Learn from a seasoned practitioner during the transition.
Avoid stressors of construction and purchasing.

Additional considerations before purchasing an oﬃce:

Consider the reputation of the oﬃce. Is the reputation one that reﬂects your practice style? If the oﬃce has a stellar reputation, it will be easy to build on that foundation. If you purchase a practice with a bad reputation, be sure to let patients know that the oﬃce is under new management and market to existing patients and new patients on that basis.
Make sure you are comfortable with the exit strategy of the current owner. It is important that the current owner commits to transitioning the patients. Owners who linger long at the practice, however, may impede patients from attaching to you.
Evaluate the ﬁnancials with trusted advisors. You need to engage an attorney to review contracts, and you need an accountant to help you understand the practice’s ﬁnancial position. A trusted banker can help you understand your obligations on loans and lines of credit.
Make a new business plan for goal setting. You cannot rely on how the previous owner conducted business. Plan for marketing, recall, patient communication, and compliance. Making goals and evaluating progress are key ingredients to successful business ownership.
Be aware that the staﬀ may resist the transition changes. Be prepared for some staﬀ to exit and other staﬀ to stubbornly hold on to the past. Be ready to help navigate the relationship-building process and take the initiative to keep staﬀ members informed about how you plan to assist them during the transition.
Make sure that the equipment is well maintained and that you have proper evidence of the maintenance schedule. Equipment suppliers and repair services can inspect the equipment before the purchase.

Deciding between buying an existing practice and starting your own is a crucial step in your journey to practice ownership. By carefully considering your goals, evaluating the pros and cons, understanding the financial implications, seeking expert advice, and conducting due diligence, you’ll be well-equipped to make an informed decision that aligns with your aspirations. Remember, each path has its own rewards and challenges, and what matters most is choosing the right path for your unique circumstances.

This blog serves as a starting point for your research, and it’s essential to consult with your Whalen professional, who can provide personalized advice based on your specific circumstances and goals. Best of luck on your journey to practice ownership!

That email or text from the IRS: It’s a scam!

Jacob Courtright on July 5, 2023

“Thousands of people have lost millions of dollars and their personal information to tax scams,” according to the IRS. The scams may come in through email, text messages, telephone calls, or regular mail. Criminals regularly target both individuals and businesses and often prey on the elderly.

Important: The IRS will never contact you by email, text, or social media channels about a tax bill or refund. Most IRS contacts are first made through regular mail. So if you get a text message saying it’s the IRS and asking for your Social Security number, it’s someone trying to steal your identity and rob you. Remember that the IRS already has your Social Security number.

“Scammers are coming up with new ways all the time to try to steal information from taxpayers,” said IRS Commissioner Danny Werfel. “People should be wary and avoid sharing sensitive personal data over the phone, email, or social media to avoid getting caught up in these scams.”

Here are some of the crimes the IRS has identified in recent months:

Email messages and texts that infect recipients’ computers and phones. In this scam, a phony email claims to come from the IRS. The subject line of the email often states that the message is a notice of underreported income or a refund. There may be an attachment or a link to a bogus web page with your “tax statement.” When you open the attachment or click on the link, a Trojan horse virus is downloaded to your computer.

The trojan horse is an example of malicious code (also known as malware) that can take over your computer’s hard drive, giving someone remote access to the computer. It may also look for passwords and other information. The scammer will then use whatever information is gathered to commit identity theft, gain access to bank accounts, and more.

Phishing and spear phishing messages. Emails or text messages that are designed to get users to provide personal information are called phishing. Spear phishing is a tailored phishing attempt sent to a specific organization or business department.

For example, one spear phishing scam targets employees who work in payroll departments. These employees might get an email that looks like it comes from an official source, such as the company CEO, requesting W-2 forms for all employees. The payroll employees might erroneously reply with these documents, which then provide criminals with personal information about the staff that can be used to commit fraud.

The IRS recommends using a two-person review process if you receive a request for W-2s. In addition, employers should require any requests for payroll to be submitted through an official process, like the employer’s human resources portal.

Scams keep evolving

These are only a few examples of the types of tax scams circulating. Be on guard for any suspicious messages. Don’t open attachments or click on links. Contact us if you get an email about a tax return we prepared. You can also report suspicious emails that claim to come from the IRS at phishing@irs.gov. Those who believe they may already be victims of identity theft should find out what to do by going to the Federal Trade Commission’s website, OnGuardOnLine.gov.

Author: Jacob Courtright

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