Business Archives - Page 12 of 42 - Whalen & Company, CPAs

New option for unused funds in a 529 college savings plan

Jacob Courtright on February 27, 2024

With the high cost of college, many parents begin saving with 529 plans when their children are babies. Contributions to these plans aren’t tax deductible, but they grow tax-deferred. Earnings used to pay qualified education expenses can be withdrawn tax-free. However, earnings used for other purposes may be subject to income tax plus a 10% penalty.

What if you have a substantial balance in a 529 plan, but your child doesn’t need all the money for college? Perhaps your child decided not to attend college or received a scholarship. Or maybe you saved for a private college, but your child attended a lower-priced state university.

What should you do with unused funds? One option is to pay the tax and penalties and spend the money on whatever you wish. But there are more tax-efficient options, including a new 529-to-Roth IRA transfer.

529 Plan to Roth IRA – Nuts and bolts

Beginning in 2024, you can transfer unused funds in a 529 plan to a Roth IRA for the same beneficiary without tax or penalties. These rollovers are subject to several rules and limits:

Transfers have a lifetime maximum of $35,000 per beneficiary.
The 529 plan must have existed for at least 15 years.
The rollover must be through a direct trustee-to-trustee transfer.
Transferred funds can’t include contributions made within the preceding five years or earnings on those contributions.
Transfers are subject to the annual limits on contributions to Roth IRAs (without regard to income limits).

For example, let’s say you opened a 529 plan for your son after he was born in 2001. When your son graduated from college in 2023, there was $30,000 left in the account. In 2024, under the new option, you can begin transferring funds into your son’s Roth IRA. Since the 529 plan was opened at least 15 years ago (and no contributions were made in the last five years), the only restriction on rollover is the annual Roth IRA contribution limit. Assuming your son hasn’t made any other IRA contributions for 2024, you can roll over up to $7,000 (if your son has at least that much-earned income for the year).

If your son’s earned income for 2024 is less than $7,000, the amount eligible for a rollover will be reduced. For example, if he takes an unpaid internship and earns $4,000 during the year from a part-time job, the most you can roll over for the year is $4,000.

A 529-to-Roth IRA rollover is an appealing option to avoid tax and penalties on unused funds while helping the beneficiaries start saving for retirement. Roth IRAs are a great savings vehicle for young people because they’ll enjoy tax-free withdrawals decades later.

Other options

Roth IRA rollovers aren’t the only option for avoiding tax and penalties on unused 529 plan funds. You can also change a plan’s beneficiary to another family member. Or you can use 529 plans for continuing education, certain trade schools, or even up to $10,000 per year of elementary through high school tuition. In addition, you can withdraw funds tax-free to pay down student loan debt, up to $10,000 per beneficiary.

It’s not unusual for parents to end up with unused 529 funds. Contact us if you have questions about the most tax-wise way to handle them.

Hiring an Associate Dentist: Timing & Key Metrics for Success

Jacob Courtright on February 26, 2024

Part 2: The Right Time

Many practitioners are curious about when to hire an associate dentist to help with the workload. In the first segment of this three-part series, we looked at common reasons doctors consider adding associates, such as capacity issues, a desire to increase profitability, and exiting the profession. In this segment, we will investigate how to evaluate specific office metrics to determine if the timing is right for hiring an associate dentist.

Opinions differ about what metrics indicate readiness for adding a new associate dentist. Most experts distill the discussion around the number of active patients, current profitability, and resources. Below, we will briefly examine these elements.

Number of Active Patients

In our first segment, we discussed capacity in two dimensions: operational and doctor capacity. Capacity refers to the ability of patients to be seen within 3 weeks of requesting an appointment. Capacity is related to the number of active patients in the practice, the provider’s availability, and the office’s operational efficiency. Assuming the office’s operations are excellent and the doctor’s availability is at the preferred level of the individual provider, it is advisable to evaluate the number of active patients in the practice.

The number of active patients is the total of individuals seen in the office for treatment within the last 18-24 months. Patients of record who have not visited the office in more than two years are not contributing to capacity problems, so they should not be considered in determining the need for an associate. Experts suggest that a single dentist can only care for 1,000-2,000 patients.

Gonzalez (2017) suggests that in addition to 2,000 active patients, general dentists should expand when the hygienists are booked 4-6 weeks in advance and there are sufficient financial resources to pay the associate’s salary for 6-12 months. Malcmacher (2005) states that doctors should aim to consistently add 10-25 new patients to the practice per month. Kesner (2018) recommends a higher standard of 35-40 new patients each month. New patient additions below that threshold may endanger office profitability if a new associate is on the team. Kesner (2018) reminds doctors seeking to add an associate that they should be experiencing a case acceptance rate of 80%. Dentists with low case acceptance rates may experience lower profitability. Before proceeding with the associateship, work on operations to improve acceptance rates. Also, Kesner (2018) notes that patient referral rates of 40%-50% indicate that the practice attracts and maintains patients.

Additionally, dental offices lose about 10% of their patients annually, so doctors should carefully watch the patient attrition rate over several months to evaluate their office trend before jumping into an associateship (Remi, 2023). Remember, it will take 18-24 months for patient attrition to manifest in the active patient pool. It is crucial to keep in mind that these are only general guidelines. Each practitioner must decide for themselves what indices best represent their practice.

Current Profitability

Measuring an office’s profitability is a complex affair. Associates working in offices not ready to transition owners will be an expense to the owner. However, associateships leading to a buy-out can be structured differently. In their Practice Transition Toolkit, Cain Watters & Associates (n.d.) suggest that one consideration of adding an associate in transition strategies is the ability to eventually share fixed costs between parties. Fixed costs are not affected by how many providers there are in the practice. These costs include rent, insurance, professional fees, and subscriptions. In contrast, variable costs (direct costs) are those that are a result of production. Variable costs include clinical supplies, laboratory bills, and staffing costs. For example, the rent doesn’t change if you add an associate, and your monthly subscriptions remain static. However, laboratory and supply bills will increase with an associate in the practice. If the practice grows, the fixed costs become a smaller percentage of the expenses while profits rise. The direct costs are shared proportionally, which leaves the owner dentist with more profit. Let’s look at an example of an associateship without a buy-out option.

Another financial consideration when contemplating adding an associate is for the owner to calculate their current break-even point. The break-even point gauges your ability to add an associate because it lets you know how much profit is needed to maintain your financial obligations and goals. The break-even point is calculated by the following formula:

Break-Even = Monthly Costs/Gross Profit %

Monthly costs are comprised of three elements:

Fixed costs (rent, debt service, insurance)
Owner’s Expenses (lifestyle, taxes, profit sharing, saving)
Variable Costs (supplies, laboratory, salaries)

Gross profit percent is calculated using this formula:

Gross Profit % = 100% – Total Variable Cost %

Using our example above and assuming monthly owner expenses as $25,000, the monthly break-even point would be calculated as follows:

Fixed Costs: $16,333

Owner’s Expenses: $25,000

Variable Costs: $392.000 (total variable costs ) ÷ $980,000 (total collections) = .40 (40%)

Gross Profit Percent: 100%- 40% = .60

Break Even = ($16,333 + $25,000) / .60 = $68,888/month or $826,656/year

Since the practice’s collections are $980,000, the owner may have enough profitability to introduce an associate into the practice because there is sufficient discretionary profit (Cain Watters & Associates, n.d.). Out of control variable costs coupled with poor collections and high fixed costs may be indicators that the timing is not right to add a provider and that the owner should look for problems in the office’s operations or overhead.

The graph below illustrates how the break-even point is the pivot between profit and loss and how variable and fixed costs relate to this financial indicator. Knowing your office’s break-even point helps you keep an eye on profitability.

Are your Resources Sufficient?

A further consideration for owners wishing to add an associate is determining if they have the necessary space, equipment, and staff to add a new dentist successfully. If space is a concern, Kesner (2018) suggests increasing the office’s operating hours from 8 hours each day to 12 per day. Doing this allows each doctor to work a six-hour shift. If both doctors can work simultaneously, ensure there is enough equipment and supplies to treat the extra patients.

Staffing is another concern to address in associateships. Be sure to carefully evaluate which auxiliary personnel and hygienists will be assigned to the new doctor. If your current staff is not sufficient, be sure to include the costs of hiring new staff members in your break-even point calculation.

Summary

Once you determine you need to add an associate, it is important to take time to consider if the timing is appropriate. Consider the office’s patient characteristics, profitability, and available space as factors to help you gauge if the timing is reasonable. Evaluating these factors before the decision is made will help ensure that your associateship will enrich your practice experience.

Resources:

Cain Watters & Associates. (n.d.). Practice transition toolkit. Financial Planning Resources (cainwatters.com)
Gonzalez, S. (12 June 2017). How to know if your dental practice can add an associate | Dentistry IQ.
Kesner, M. (2 May 2018). How to decide when to hire an associate | Dental Economics.
Malcmacher, L. (1 Aug 2005). The new patient myth | Dental Economics.
Remi. (23 Feb 2023). How Profitable are Dental Practices? Break-even & Profits (sharpsheets.io)

Auditing revenue recognition

Jacob Courtright on February 16, 2024

The top line of an income statement for a for-profit business is revenue (or sales). Reporting this line item correctly is critical to producing accurate financial statements. Under U.S. Generally Accepted Accounting Principles (GAAP), revenue is recognized when it’s earned. With accrual-basis accounting, that typically happens when goods or services are delivered to the customer, not necessarily when cash is collected from the customer.

If revenue is incorrectly stated, it can affect how stakeholders, including investors and lenders, view your company. Inaccurate revenue reporting also may call into question the accuracy and integrity of every other line item on your income statement, as well as amounts reported for accounts receivable and inventory. So, auditing revenue is an essential component of a financial statement audit.

Audit standards

Under GAAP, you typically must follow Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. This standard went into effect in 2018 for calendar-year public companies and 2020 for calendar-year private entities. It requires more detailed, comprehensive disclosures than previous standards.
Under ASC 606, there are five steps to determine the amount and timing of revenue recognition:

Identify the contract with a customer.
Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance obligations.
Recognize revenue when the entity satisfies the performance obligation.

When auditing revenue, auditors will analyze your company’s processes, including the underlying technology and internal controls, to ensure compliance with the rules. The goals are to ensure that your process properly records every customer obligation accurately and that revenue is reported in the correct accounting period.

Audit procedures

During fieldwork, auditors will scrutinize internal controls related to every phase of a customer contract, the appropriate segregation of duties, and the accounting processes governing the booking of revenue in the appropriate periods. They’ll also select a sample of individual customer transactions for in-depth testing. This may include reviewing contracts and change orders, inventory records, labor reports, and invoices to ensure they support the revenue amounts recorded in the general ledger. In addition to helping validate your revenue recognition process, testing individual transactions can uncover errors, omissions, and fraud.

Auditors will also analyze financial metrics to root out possible anomalies that require additional inquiry and testing. For example, they might compute gross margin (gross profit divided by revenue) and accounts receivable turnover (revenue divided by accounts receivable) over time to evaluate whether those ratios have remained stable. They might compare your company’s ratios to industry benchmarks, too, especially if demand or costs have changed from prior periods.

Eyes on the top line

Stakeholders — including investors, lenders, suppliers, customers, employees, and regulatory agencies — use the information included in financial statements for many purposes. If your revenue recognition process is flawed, it tends to trickle down to other financial statement line items, compromising the integrity of your financial statements. So, it’s important to get it right. Contact us to discuss audit procedures for revenue and ways to improve your revenue recognition process.

Get ready for the 2023 gift tax return deadline

Jacob Courtright on February 13, 2024

Did you make large gifts to your children, grandchildren, or others last year? If so, it’s important to determine if you’re required to file a 2023 gift tax return. In some cases, it might be beneficial to file one — even if it’s not required.

Who must file?

The annual gift tax exclusion has increased in 2024 to $18,000 but was $17,000 for 2023. Generally, you must file a gift tax return for 2023 if, during the tax year, you made gifts:

That exceeded the $17,000-per-recipient gift tax annual exclusion for 2023 (other than to your U.S. citizen spouse),
That you wish to split with your spouse to take advantage of your combined $34,000 annual exclusion for 2023,
That exceeded the $175,000 annual exclusion in 2023 for gifts to a noncitizen spouse,
To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($85,000) into 2023,
Of future interests — such as remainder interests in a trust — regardless of the amount, or
Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent that an exclusion doesn’t apply, and you’ve used up your lifetime gift and estate tax exemption ($12.92 million for 2023). As you can see, some transfers require a return even if you don’t owe tax.

Who might want to file?

No gift tax return is required if your gifts for 2023 consisted solely of gifts that are tax-free because they qualify as:

Annual exclusion gifts,
Present interest gifts to a U.S. citizen spouse,
Educational or medical expenses paid directly to a school or health care provider, or
Political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, you should consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

The deadline is April 15

The gift tax return deadline is the same as the income tax filing deadline. For 2023 returns, it’s Monday, April 15, 2024 — or Tuesday, October 15, 2024, if you file for an extension. But keep in mind that, if you owe gift tax, the payment deadline is April 15, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2023 gift tax return on IRS Form 709, contact us.

Liquidity overload: Why having too much in your cash reserves may be bad for business

Jacob Courtright on February 9, 2024

In today’s uncertain marketplace, many businesses are stashing operating cash in their bank accounts, even though they might not have imminent plans to deploy their reserves. However, excessive “rainy day” funds could be an inefficient use of capital. Here’s a systematic approach to help estimate reasonable cash reserves and maximize your company’s return on long-term financial positions.

What’s the harm in stockpiling cash?

An extra cushion helps your business weather downturns or fund unexpected repairs and maintenance. But cash has a carrying cost — the difference between the return companies earn on their cash and the price they pay to obtain cash.

For instance, checking accounts often earn no (or very little) interest, and many savings accounts generate returns below 2%. If a company has cash reserves while simultaneously carrying debt on its balance sheet, such as equipment loans, mortgages and credit lines, it will pay higher interest rates on loans than it’s earning from the bank accounts. This spread represents the carrying cost of cash.

What’s the optimal amount of cash to keep in reserve?

Unfortunately, there’s no magic current ratio (current assets divided by current liabilities) or percentage of assets that’s right for every business. A lender’s liquidity covenants are just an educated guess about what’s reasonable.

However, you can analyze how your company’s liquidity metrics have changed over time and how they compare to industry benchmarks. Substantial increases in liquidity — or ratios well above industry norms — may signal an inefficient deployment of capital.

Prospective financial reports for the next 12 to 18 months can be developed to evaluate whether your company’s cash reserves are too high. For example, a monthly forecasted balance sheet might estimate expected seasonal ebbs and flows in the cash cycle. Or a projection of the worst-case scenario, based on certain what-if assumptions, might be used to establish a company’s optimal cash balance. Forecasts and projections should take into account a business’s future cash flows, including capital expenditures, debt maturities, and working capital requirements.

Formal financial forecasts and projections provide a method for building up healthy cash reserves. This is much better than relying on gut instinct. You also should compare actual performance to your forecasts and projections — and adjust them, if necessary.

What’s the highest and best use of excess cash?

After prospective financial reports and industry benchmarks have been used to determine a company’s optimal cash balance, management needs to find ways to reinvest its cash surplus. For example, you might consider repurposing the surplus to:

Invest in marketable securities, such as mutual funds or diversified stock-and-bond portfolios,
Repay debt to lower the carrying cost of cash reserves,
Repurchase stock, especially when minority shareholders routinely challenge management’s decisions, or
Acquire a struggling competitor or its assets.

With proper due diligence, these strategies could allow your business to reap a higher return over the long run than leaving funds in a checking or savings account.

We can help

Contact us for help creating formal financial forecasts and projections and evaluating benchmarking data to devise sound cash management strategies. We can guide you toward more efficient use of capital while reserving enough cash on hand to meet your business’s short-term operating needs.

Category: Business

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