If you are planning a future chiropractic practice sale or transition next year (or within the next three years), there are some strategies that you can employ at the end of the year to better position your business for the eventual sale or transition.
The good news is that they are relatively simple moves that can be done quickly. The bad news is that they are time-sensitive and you may need to act quickly this calendar year in order to reap maximum benefits.
Solving the Year-End Tax Dilemma
If you are like many small business owners, the end of the fiscal year represents your last chance to employ some tax-saving strategies such as a Section 179 deduction for large equipment purchases or making other deductible purchases that may offset the taxes you owe next year.
While tax savings is always a great goal, chiropractors who are planning a future chiropractic practice sale or whose transition can be seen “in the headlights,” you may want to consider how you structure your attempts to save on taxes.
For example, if you were to purchase a $20,000 table, that generally qualifies as a deductible expense and, in many cases, your CPA may choose to write off the entire expense this year as a Section 179 Deduction. So, in terms of tax savings, the table meets the goal.
But keep in mind that you also have a goal of maximizing the value of your future chiropractic practice sale. Here, the $20k equipment purchase may fall short. When selling your practice, your equipment rarely commands full face value for the same reasons that when you buy a car and drive it off the lot, it’s worth less than when you paid for it. So, in this sense, the $20k expense achieved the tax deduction, but it falls a little short of creating a $20k asset that literally adds $20k to the value of your practice.
The Advantage of Retirement Contributions
On the other side of the fence, if you were to take that same $20k and put it towards your Retirement Contributions, you will save taxes as well as these contributions (assuming they are not to a Roth IRA) can be made pre-tax and therefore lower your taxable income.
With retirement contributions, you also get a second win possible in the fact that when it comes to your future chiropractic practice sale or transition, this is shown to your buyer as Discretionary Owner income, thus ADDING to the profitability and increasing the potential value of your practice.
In other words, if you pay yourself $100k in salary + put $20k to retirement, your Owner Compensation is actually $120k. Because the retirement contribution is considered “discretionary” in that some owners choose to contribute, some don’t and some contribute at different levels.
Equipment is not seen in the same manner by your buyer. That is, a buyer believes that the reason you bought the equipment is the fact that you believe it is necessary to the operation of the business.
Sure, you can try to explain to them that you just bought it for a tax deduction, but that creates two problems: first, the buyer then may not want the piece of equipment, since it’s not necessary and just represents an added expense to them (and therefore it does not increase the value of the practice to you or them). Additionally, the buyer may not feel the optional equipment is worth full value since you’ve just told them its optional; and the same effect will happen on the value of your practice. Finally, someone doing an appraisal or valuation will not see the equipment purchase as optional; they will view it as a necessary operating expense although, as mentioned above, it may not be valued at full face value.
What About Salary Distributions?
Some chiropractors may also wonder how salary distributions would impact the same scenario. Certainly, you can just pay yourself an extra $20k and that would show up as owner income and thereby be more appealing to your future chiropractic practice sale. But you’ve got potential tax consequences too unless your distributions would not meaningfully impact your tax picture.
Exercise Discretion and The Obvious Disclaimer
The point of this post is that if you are looking to save on taxes and have some extra cash on hand, exercise discretion. If the goal is to transition or sell your practice soon, then the best expenditures will achieve both goals: save taxes and increase value.
Finally, the obvious disclaimer here is The Strategic Chiropractor LLC and this website (www.strategicdc.com) do not provide tax, legal or accounting advice. This post has been written for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
In other words, talk to your tax or financial professional about how the situation best applies to you 😉