The all too common scenario: (for offices with 2-150+ physicians)Dr. John Smith, age 40, making $500,000 a year in income, after researching income tax reduction solutions/supplemental benefit plans decided that he would like to implement a such a plan. Dr. Smith is terribly excited about a plan that will allow him to put away $75,000 a year in a tax favorable manner for use at a later time.
Dr. Smith works in a 20-doctor practice and after researching the tax reduction plan goes to his partners and tells them that he wants to implement a plan and tells the partners that they will not have to pay for the plan and the plan does not require the inclusion of any other doctor or the employees. However, the plan, like all non-qualified income tax reduction plans, requires a "corporate deduction" and Dr. Smith, therefore, needs to have the partners approve the use of the corporation to implement the plan.
Dr. Smith even tells the partners he is willing to indemnify the corporation should there ever be any adverse consequences of implementing the plan.
Out of the 20 physicians in the group, 5 are younger non-partners who are also interested in the plan. Unfortunately, 5 of the founding members (who also make up the Corporate Board for the group) are over the age of 55 and decide among themselves after little or no review of the plan that there is no upside to them and, therefore, tell Dr. Smith that they do not think it is a good idea and that they will not vote to allow him to implement the plan.
Dr. Smith is beside himself and joins the thousands of doctors around the country in a similar situation where they work in medical practices (or hospitals) either as owners or as employees where the main physicians or the CEO who runs the group VETO any plan that does not have an upside for those physicians or the organization as a whole.
The above scenario is a sad situation that I have seen all too often. I would say that half the calls I receive on advanced topics are from doctors in groups in excess of five doctors (or employees of hospitals); and out of those who want to implement advanced income tax reduction plans, over half of them run into problems with their partners when asking for permission to implement a plan through the corporation.
The "perfect corporate structure" is fairly simple and several medical offices around the country already have the structure. Most multi-physician medical offices have a main company (usually a C or S corporation) that employs both the physicians and all the employees. Let's call that the "mother" company. If a physician wants to implement any kind of income tax reduction plan, it must be done inside the "mother" company and, therefore, there must be an agreement of the partners to allow one or more physicians to implement such a plan. As I've stated above, it is virtually impossible to get five plus physicians to agree to anything and, therefore, one physician has little chance of getting an agreement to implement any kind of advanced plan.
With just the "mother" company in place, all the employees take their income from the "mother" company usually via W-2 income.
The "perfect corporate structure" exchanges a Professional Corporation (P.C.) for the physician as the entity to receive income that the physician would normally receive. So instead of Dr. Smith receiving a W-2 paycheck from the "mother" company, the "mother" company would instead cut that paycheck to Dr. Smith, P.C. where the P.C. would, in turn, cut a paycheck to Dr. Smith.
Is it complicated to create a P.C. and have it paid instead of the physician? Absolutely not. If Dr. Smith has a contract with his medical office that says "Dr. Smith" will get paid whatever he is to be paid, Dr. Smith would simply re-do the contract to state that Dr. Smith's P.C. will be paid his normal W-2 income (plus the normal matching corporate payroll taxes the "mother" company would pay on his behalf) as a consulting fee.
In Dr. Smith's 20-physician group, Dr. Smith could be the only one getting paid to a P.C. or any or all of the other physicians (either owners or employee physicians) can do so as well.
Once Dr. Smith has money in his own P.C., he can choose to do whatever he wants with that money without asking permission of the partners in the "mother" physician practice.
I've talked with practices lately where the physicians are not allowed to write off any portion of their automobile lease payment, their cell phones, or food. In the "perfect corporate structure" each individual physician can make that determination for him/herself.
The biggest benefit to the "perfect corporate structure" is the ability of each physician to implement their own income tax reduction plan without having to beg for approval from the partners in the "mother" corporation. As you may have read over the past two years, I've discussed several different income tax reduction plans almost all of which can be implemented in an individual physician's P.C.
Why wait? If you are in a practice where you have no ability to do individual tax planning, you are costing yourself thousands in income taxes that could be saved or deferred via a non-qualified supplemental benefit plan.