Income Tax Reduction

The best way to illustrate how A/R factoring works to reduce taxes and fund a supplemental benefit plan is through an example.

Dr. Smith (age 45) earns $800,000 a year as an orthopedic surgeon in his company Dr. Smith P.C. He is tired of being limited by his 401k/profit sharing plan as a tax deductible vehicle and is not interested in a defined benefit plan or 412i plan because of the amount of money he would have to kick in for the staff to allow him to put away more money in a tax deductible manner. Dr. Smith hears of A/R factoring and decides that he would like to reduce his income $100,000 a year if he could put that into a favorable tax planning vehicle.

Dr. Smith P.C. contracts with a factoring company to sell $500,000 of his A/R at a 20% discount ($400,000). Dr. Smith then takes home income of $700,000 (pre-tax) for the year.

The factoring company contributes 88% of the factored amount ($100,000 x .88 = $88,000) into an investment (life insurance). The 88% represents 89% of the total premium going into the life policy.

Dr. Smith on a post tax basis will become an investor in that same life insurance policy where Dr. Smith will put in 11% of the premium ($10,876) and now co-owns the policy with the factoring company.

By contract Dr. Smith will have access to all the cash value in the policy via policy loans (tax free income) and the factoring company when Dr. Smith dies will get the majority of the death benefit.

What does A/R Factoring accomplish: looking at the numbers

What does A/R Factoring accomplish? It protects your medical office's largest asset (it's A/R), reduces the income taxes of key physician(s) and creates a supplemental benefit plan that does not require funding from for other employees and functions 155% better then post tax investing.

Side Note:

I've indicated in many articles that it is very difficult for one doctor out of five or more to get an income tax reduction plan approved (see perfect corporate structure article). I submit to the readers that a fellow partner should welcome the opportunity to have a partner implement the A/R factoring plan. Why? Because A/R is owned from a creditor standpoint by the medical office and if one physician wants to asset protect $500,000 or more of that A/R via the factoring plan, the partners should welcome that with open arms.

I rarely give out the names of companies (vendors) in my article, but if you would like to know the name of the A/R factoring company discussed in this article please feel free to e-mail me or give me a call.

Example reducing Dr. Smith's take home pay by $100,000 via factoring plan:

(Assume Dr. Smith factored $500,000 of his A/R for 10 years at a 20% discount. Also assume a 7.9% return in the stock market pre-tax and 7.9% in the life policy)

Available funds at age 66-85
Post tax investing - $95,294 a year after tax from brokerage account A/R Factoring's Life Policy - $243,871 income tax free via life policy loans
Difference - A/R factoring as illustrated is 155% better then post tax investing.

Roccy DeFrancesco, J.D., is the President of Financial Management Group, LLC a company devoted to help small business owners (specifically physicians) on asset protection, income and estate tax reduction. He can be reached via email at This email address is being protected from spambots. You need JavaScript enabled to view it. or phone 269-469-0537. Purchase Roccy's Book The Doctor's Wealth Preservation Guide".

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