I receive a number of calls from physicians in December who are looking to find the "magic" tax reduction plan to help them defer the $50,000+ that is sitting in the corporate bank account at the end of the year. That is money the physician does not want to take home and would like to have it go somewhere in a tax favorable manner and do so without a big expense for the employees.
Related article: The basics of accounts receivable factoring
Many advisors today are pitching defined benefit (DB) plans and 412i defined benefit plans. The problem with either plan is that the amount of money a physician has to pay for their staff (who must be included in the plan) usually runs between 20-40% of what the physician contributes to the plan (which is very expensive).
Deferring up to $300,000 of income a year
The ABC Plan is a very simple plan that allows physicians to defer $50,000-$300,000 plus a year where there is no contribution for the employees. The money can stay income tax deferred for up to 30 years where it will grow at market rates.
The beauty of the ABC Plan is that it can be setup on a monthly basis going forward and so for physicians that wished they had done something last year to reduce their taxes, they can start out the year with a new tax deferral plan so the same problems do not arise at year end.
What is the ABC Plan? It is a method of selling an amount of accounts receivables (A/R) in exchange for a deferred installment note. The selling of A/R is called "factoring".
How does the ABC Plan work?
1) A medical practice (hereinafter MP) sells a specific amount of A/R to an Accounts Receivable Factoring Company ($25,000-$100,000+).
2) The Factoring Company (hereinafter FC) takes a 5% factoring fee on the A/R factored and issues to the MP an installment note for payment of the remaining 95%. This installment note has repayment terms as dictated by the medical practice selling the A/R.
3) When the MP collects the A/R that was sold, that money is transferred to the FC.
4) The FC invests the money it receives (minus the 5% factoring fee). Typically, the money is invested in indexed annuities that have minimum guarantees and growth pegged to the S&P 500 index.
5) When the installment note comes due to pay the MP, the FC pays back to the MP the initial amount factored (minus the original factoring fee) plus any growth on the money (as it was pegged to the S&P 500 index).
6) The MP then can choose to use the money for any business purpose including the option of paying it to the owners/physician as a bonus.
Assumptions: Assume the client Dr. Smith, age 40, works for XYZ Orthopedic Clinic, P.C., makes $600,000 a year and has an extra $100,000 he does not need to take home as income this year. Further assume that the medical practice at any given time has $700,000 of real A/R on the books and that Dr. Smith's patients represent $200,000 of that A/R.Read More