If you decide to become part of a multi-physician practice, you can get benefits like financial security and greater flexibility. But what about the tax implications? These practice structures have unique considerations to know about as you start planning for things like retirement and entity creation.
We’ll be covering these three topics geared explicitly toward multi-physician practices:
- Choice of practice entity
- Retirement planning strategies
- Succession planning strategies
1. Choice of practice entity
The first type of group practice entity to be aware of is a general partnership (GP), an easy and straightforward option.
- Simple tax filing and paperwork
- Flexibility to structure allocations of income and capital
- Joint and several liability for all general partners
- Net income is subject to self-employment taxes if it’s not an S corporation
Other options include a professional corporation (PC) or professional association (PA), common for licensed professionals like attorneys or physicians.
- Can be either an S corporation or C corporation
- Minimizes joint and several liability from other shareholders’ negligence
- May result in double taxation if a C corporation
- Could restrict special allocations of net profits if an S corporation
- Corporate formalities and reporting required
- Individual judgment creditors not limited to charging order
Next, let’s look at creating a professional limited liability company (PLLC) or a limited liability partnership (LLP).
- Can be a partnership, S corporation, or C corporation for tax purposes
- Minimizes liability
- Doesn’t require corporate formalities
- Could result in double taxation if a C corporation
- Net income is subject to self-employment tax if not an S corporation
Depending on your state, you may not have all of these options available. For example, California doesn’t recognize PLLCs for physicians. Thus, a professional corporation is usually the best option if you live in a state with similar restrictions.
But if your state allows it, a PLLC is one of the best possibilities when practicing as a group. It offers the best of all worlds—flexibility, limited liability, and tax efficiency.
Remember that if you’re a corporation, PA, or PC, you can’t elect to be taxed as a partnership, so you’d be taxed as S or C corporation.
2. Retirement planning strategies
Here is a quick look at the 15 top considerations for physicians when retirement planning:
- Maximum allowable annual contribution
- Annual contribution flexibility amount
- If incidental benefits are allowed
- If loans are allowed
- If employee discrimination testing is required
- If employee vesting is allowed
- Date when the plan must be established
- Deadline for contribution
- Tax treatment of contributions
- Payroll taxes owned relative to contributions
- If integration with other plans is allowed
- If plan assets are protected from creditors
- Tax treatment of distributions
- Cost to establish and maintain
- Ability to self-direct investments
Let’s go over the basics of retirement plan options for multi-practice physicians.
This is the simplest type of group plan. It has no cost to set up, it’s easy to maintain, and it’s flexible year-to-year. You can defer up to $13,500 per year, or $16,500 if 50 or older. You can put in up to 3% of your compensation, and it works like a 401(k). But the biggest limitation is that it has a low maximum contribution.
This is another prevalent option. It’s also easy to administer and set up, with no administrative costs. A plus is that it gives you lots of flexibility over the types of investments.
The non-safe harbor 401(k) is generally not the best option for a group practice. A safe-harbor 401(k) with matching allows you to put the full amount into the 401(k) plan as long as you can match employees’ contributions. And a Solo 401(k) allows you to put up to $57,000 in the plan, or $62,000 if over age 49.
Back-door Roth 401(k)
This option allows you to put $19,500 into a Roth 401(k) and $37,500 in a profit-sharing plan that can then be rolled over to a Roth IRA.
These plans can be subject to a vesting schedule, and you can contribute 25% of annual compensation or $57,000 (and $6,500 more if you’re over age 49).
Defined benefit plan
There are three types of defined benefit plans:
- Cash balance defined benefit plan: Allows high contributions for older employees, and you can maximize contributions relative to payroll tax liability. Assets are protected from creditors.
- 412(e)(3) defined benefit plan: Allows you to bump up contributions higher than in a cash balance plan if you’re older.
- 401(k) and 401(h) combination: Allows for much higher contributions. You can maximize relative to payroll tax liability, and it allows 25% to be allocated to incidental benefits that are distributable tax-free.
Restricted property trust
This is great for funding buy-sell transactions, and the distributions don’t impact social security benefits taxation or the tax bracket. There are also no annual contribution limits.
7702 plan/family bank
This is a permanent life insurance policy that has the benefit of tax-free growth and tax-free income. You can see a significant tax break with these plans.
Note that the back-door Solo 401(k), the restricted property trust, and the 7702 plans all have tax-free distributions.
3. Succession planning strategies
Now, let’s cover some basics about succession planning if you’re part of a multi-physician practice.
Having a solid buy-sell agreement is a must. Triggering events for these agreements include these eight “Ds:”
Make sure that the agreement covers each of these issues that are likely to arise.
In addition, valuation in the buy-sell agreement needs to be fair and up to date. Consider options like fixed price, formula price, appraisal, and differential pricing.
Other important terms include:
- Redemption versus cross-purchase
- First rights of refusal versus option to purchase
- Use of life insurance
- Use of disability buy-out insurance
Succession planning tax strategies
Consider these options to improve your tax strategy:
- 1202 Corporation: If you sell stock and hold it for five years, you can exclude up to $10 million in gains upon the sale of the stock.
- Closely-held insurance company: It allows you to shift up to 10% of gross revenues or up to $2.3 million, whichever is less, into a captive insurance company. You can have this entity cover risks that you wouldn’t have covered in a commercial policy. This is an excellent option for practices with high revenues.
- Family endowment plan: This plan gives you a deduction on the front-end. But when you sell a depreciated asset, the capital gains tax on 99% of that income is completely tax-free. There is a dual benefit in the form of creating a charitable deduction plus tax-free proceeds.
- Employee stock ownership plan (ESOP): This plan allows you to sell up to 30% of your business to the ESOP. And as long as you invest those sale proceeds in qualified replacement property (stock or bond portfolio), you don’t have to pay capital gains tax on sale proceeds. All income generated inside the ESOP is tax-free.
Meeting with a tax professional
When you are tax planning for a multi-physician practice, your best first step is to meet with qualified tax professionals who can walk you through the options.
Physician Tax Solutions supports busy medical practitioners with proactive strategies and full-service tax preparation services that dramatically reduce tax bills. Contact us online or by calling 1-855-693-7829 to start saving today.