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The Tax Basis Trap: What Dentists Don’t Know Could Cost Them · The Millionaire Dentist™

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Hello, everyone, Welcome to the Millionaire Dentist Podcast, brought to you by
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four Quadrons Advisory. On this podcast, we break down the world of dentistry,
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finances and business practices to help you become the millionaire dentists you deserve to
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be. Please be advised we do speak with an honest tongue and may not
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be safe for work. Hello and welcome. This is Casey Hires back at
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the Millionaire Dentist Podcast in studio with co host Jared Bridgeman. Casey, how
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are you doing great? Are you feeling refreshed from your your recent trip refreshed?
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Well? Boston was great. Boston Yankee Dental Congress was It's a great
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national meeting. Those in the Northeast really enjoy it. But yeah, you
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know, it cut my weekend a little short. So I don't know what
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refreshed. But you're here. I feel strong. Yeah, you look strong.
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Hey. We had a sold out room and a lot of folks that
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we're excited to hear about the business side of dentistry. For a couple of
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that's great. That's great, and they didn't just leave after the first ten
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minutes part. Yeah, so that's a testament to your ability to entertain.
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Casey. You came back, you're in the room and I bombarded you with
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a We have a special guest in here today. He is h you've heard
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him on here before. He is a CPA and he's a real smart fella.
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Kevin Roten. He is here and he also has his NBA don't sell
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him and NBA dang, and he's a BBQ master as well, self proclaimed
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self proclaimed I've had something. It's fantastic. Kevin is fueled on mountain dew
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and meat, and this morning his mountain dew was not in the refrigerator.
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Jared, someone took it over the weekend, and shockingly he admitted it.
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Jared Bridgeman stole Kevin's mountain dew. Listen. I was here at five o'clock
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on a Sunday, putting in the hours, helping everyone out here, and
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I was parched. Yeah, Kevin audible grown on a Monday. Yes,
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But guess who came through for me, mister Casey himself a big old fountain
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pop. I knew what would happen Kevin didn't get his mountain dew. Uh.
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You've seen lou fregnant in the haulk right, very similar. So I
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ran out and got it, got him his go juice, and I appreciate
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that he's going to join us today. We are Kevin, you wanted to
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come and chat with us about tax basis? Am I saying that right?
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Yes? Text, Yes, tax basis in A B B A I no
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B A S I S not B A S E S. Not like baseball
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base bass basis. Yes. See how smart you are. We don't know
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how to spell it. Wow. Yeah, So, Kevin, can you
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walk me through you know, I don't even know what that means. I'm
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not gonna sure. Yeah, okay. So, and by the way,
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we've had a couple of podcasts on this in general, but Jared and I
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both are I don't retain information. We need to hear it again. And
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when I'm out amongst practice owners, I mean, I speak one language,
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but if tax basis gets brought up, it's as if I'm speaking another language.
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So I think our listeners would probably enjoy hearing a little bit more about
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it. So dumb it down, okay for us, dumb guys. Absolutely.
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So what I'll mostly be talking about today is S corporation stockholder basis.
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There's different types of basis, but we like to see our practice owners have
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an S corp type of entity for their practice. Is es corp short for
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S corporation? Yes, yeah, because there's so many tax advantages to an
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es corp the past pass through of income to the individual level, so you
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bypass that double taxation that C corps have, and then you also bypass the
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self employment tax on earnings that sole props have. Our sole proprietorships schedule sees
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flulldown professor. So actually, in the in the class at the Yankee Dental
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that that we did, anentity structure came up and some different questions in the
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past, perhaps other entity structures were used, or there were reasons or advantages
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too. But in the last how many last couple of years, five years,
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eight years, ten years, I'm just curious. S corps or s
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corporations tend to have the most flexibility, ability to reduce tax liability and save
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and have access to your to your funds and really adds consistency. But is
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there a timeline where that changed? Because I've had some more seasoned people and
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they almost asked, you know, when did this happen? And I've and
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I know in the past, like decades ago, potentially there were some other
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entity structures because some people this is like brand new news. Others will say,
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you know what, I've thought about that, or I've read about that,
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or I was told about that, but my CPA doesn't want to make
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the change. Yeah. So the actual ES Corp has been around for quite
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a while, but it probably in the last twenty twenty five years has really
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gained momentum in how people structure their entities because just like you said, it
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has so many benefits without the disadvantages of those other types. So it really
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has grown in momentum. Twenty twenty five years sounds like so long, but
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yet I remember where I was at been two thousand hit and I mean we're
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getting close to where twenty five years ago was still two thousand eights. Yeah,
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that's rough. But yeah, even from an Indy structure, though,
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there are some practices out there that they're not even aware that an S corporation
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or ANES Corp perhaps might be the best for them. Correct. Yep.
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Yeah, we've seen quite a few prospects come in that are not S corps,
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and we point out and show here's where those disadvantages, here's where it's
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hurting you so but with that S Corp election, you get into having needing
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to keep track of your tax basis. Going back to to what Jared was
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mentioning, is that tax basis is important to track on an annual basis,
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and in fact, on tax basis on an annual basis, what are you
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doing to us? What are you doing to us? Tax basis is important
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to keep track of and annually on an annual basis. Oh and a lot
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of practice owners and I think maybe even you guys included when it comes to
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basis or like, huh, what is that? Yep? Correct? So
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think of it like the equity that you have in your house, or in
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this case, the equity that you have in your practice. You really can't
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shouldn't go below zero on your equity. You build equity, or think of
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it like a checking account where you increase your checking account with deposits and it
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goes down with withdrawals. I've always heard of people talk about, oh,
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I got upside down on my car loan. I bought this really cool car
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and I paid eighty thousand for it, and then I want to get rid
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of it, and I didn't pay cash, so I owe sixty but it's
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only worth forty than in this example? Is that a poor man's example of
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what basis is. Yeah, in a way that can help you with visualize
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what we're talking about. You can't get upside you don't want to get quote
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unquote upside down in base. How do people do that by having more losses
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than they have gains when their income is so low and they pull money out
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through distributions, when they have multiple years of losses, when they don't plan
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right for improvements, equipment purchases, things like that. So great dentists and
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specialists who have a Hodgepodge team doing this can potentially get in trouble with basis.
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Yes, yeah, well, and the ones I recall seeing or hearing
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about as you go through these, and we'll talk in real life with people
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as we're vetting them. Some of the like the big operations, big production,
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big collections, maybe a couple, some big operations sometimes with a lot
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of money moving in and out everywhere and all over the place. When you
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distill it down, they have basis issues, which fascinates me because it's like
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a house of cards. These these larger operations have less basis, and I'm
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always curious as to why, I don't know, but it can happen to
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anybody. Yeah, anyone. Yeah, We've seen many that where their net
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income might be half a million dollars. Well they're either through Section one seventy
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nine expenses or just taking money out, maybe taking too much money out.
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Even though you're make you know, your gross is one point five million,
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you're netting five hundred thousand, four hundred thousand. If you're taking three hundred,
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four hundred thousand dollars out of the practice, then you're still left with
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zero basis and that you know that can hurt when there's these large expenditures.
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Actually being able to take advantage. Well, I think that's a good cliff
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Notes version of basis. I think I've got a lot of questions, But
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what are a couple of the highlights that you want our audience members to hear
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about basis, about the importance of it, or things to take note of.
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So if I can, again going back to that kind of checking count,
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where when you start your business, there's an initial maybe an initial influx
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of cash that you put in. That's your initial deposit, that's your initial
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basis, and then year one you make one hundred thousand dollars. So now
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your basis is at one hundred thousand dollars, you take out fifty thousand dollars
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in distributions, that's a withdrawal. Now you're at fifty thousand dollars in basis.
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It's important to keep track of that give important for your accounting team for
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that's exactly right, because when your scanner goes out or any type of piece
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of equipment, Hey, I need to replace this one hundred thousand dollars,
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Well, you can't take that expense right away, and it hurts with taxes.
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One other major thing with basis is that can limit your distributions that you
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can pull out of the practice, which distributions think of as non taxable withdraws.
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It's very important that you don't go above because distributions, any of themselves,
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should be tax free if you plan it right, if you have a
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good advisor to help you with planning that out, then those distributions should be
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tax free. If you get into basis issues where that goes to zero and
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you have carry forward losses, you can't take those losses, and then you
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start taking money out, then those can become taxable and to anywhere from like
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fifteen percent or up. So you're paying unneeded taxes fifteen percent tax on something
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that should be tax free because of poor planning, poor tracking and basis.
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So many practice owners we talk to, you know, not only do they
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not understand maybe what basis is, but they don't know if it's an issue
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for them or not. And so some of these practice owners who are out
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there running a gun and then trying to make the best decisions they can and
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they've got their college buddy maybe as their tax planner, and they're a nice
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person and they do a nice transaction of filing taxes. Like when does a
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practice owner get headwinds? Obviously two hundred thousand Dennis in a country we're not
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vetting all of them. We tell them, but when does this come up
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when they're like, Oh, I've got a basis issue and it's causing this
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problem and thorn in my side? Like what what's a couple common examples when
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it comes to cause. It seems like a lot of people we talked to
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you they've had basis issues for years and then when we talk about it,
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they have no idea what we're talking about, which, again, their standard
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of care for accounting is poor, but when is it rear, it's ugly
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head for the common practice owner who's just crushing dentistry but not crushing accounting.
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Yeah, a lot of times it can be when it's time to replace equipment.
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You know, they they'll get a hundred thousand dollars piece of equipment and
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then they're still wondering why their taxes are so high, which is funny,
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ironically, they'll do that to lower their taxes, and then they go do
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that and they didn't have any room to do it. Nobody told them,
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yep. And buying equipment to lower taxes is unless you actually need it,
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is not a great tax strategy. Correct, boy, you're in those reps.
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Come after you, Oh, get this section one seventy nine deduction when
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you might not even be eligible for it. I get on a few soapboxes
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when I present, I may have yelled at the audience about don't fall for
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this one seventy nine crap. If you need something awesome, most of the
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time you don't. What are you doing? Hey, I screwed up your
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taxes. Can you go buy a ninety thousand dollars truck? I mean that's
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what basically a lot of CPAs tell their people to do I don't really need
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a truck, now you need to go buy it. Well, you're the
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professional, okay. Yeah. And then when I'm like, no, that's
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terrible tax planning, it's like a light bulb goes off. I digress.
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It is fun to have a nice, nice new gifts and presents and twice
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for yourself. Oh yeah, that's a whole nother ash. Last, that's
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a whole nother podcast right there. It's called feasting. When you succeed and
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do well, you have to enjoy it, you know, And there's something
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to be said for that. But okay, so they go buy a piece
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of equipment and they did not get the tax benefit that they thought they would
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get. Boom basis. Okay. Also, again I hit on distributions.
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A lot of times, they'll get capital gains tax that shows up on their
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tax months later, like you know, yeah, you know, come April,
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here's a tax bill. Yeah, and like I said, fifteen percent
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or more on something that should be should not be taxable. Uh but yeah,
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no, you know, fifteen hundred dollars two thousand thousands of dollars or
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more. So, So let's say somebody just whatever. They don't care.
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They keep taking distributions and getting crushed on that side of it. They buy
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something like how long can that can that keep going? Like when do the
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chickens come home to roost? In a way that's like even more dramatic than
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this already is would be. Ultimately, it's just yeah, every year you're
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getting deemed with taxes, deemed with taxes, more taxes, additional taxes,
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and then time to sell you got it's like negative equity in your house.
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Oh, you don't get to make as big, you know, as much
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or or that taxable amount on your gain, which means this whole time you
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probably weren't saving as much as you should have because you're getting dingmed on things
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you should have been dinged on. And then you're hoping, oh, I'll
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just make it up when I sew my practice when I'm ready to retire,
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and then you come to find out I'm not getting as much as I hoped.
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Yeah, and I want to hear more about basis, But how would
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a practice owner listening, Like what's the way to verbalize, you know,
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hey, local CPA, do I have basis issues? Like? What what
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does that sound like? Yeah, just like that. Well, actually,
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you can look at your tax return because over the past couple of years,
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the IRS has required Form seventy two oh three to be filed with a practice
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owner or anes corp shareholder's tax return. So you can go to that form.
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Look, it'll show you. It'll tell you what your basis is in
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your practice, and if it's at zero, it'll also show you what losses
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or expenses or things are having to be carried forward until you grow that basis.
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Well, I know, one of the things we try to focus on
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as we're educating these different conferences and seminars, it's you know, shareholder loan.
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Right to me, it's a one on one level piece of information I'm
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sharing. But I tell most folks, hey, email your CPA and just
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ask them do I have a shareholder loan on my balance sheet? And so
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a lot of them are like, OK, good, I mean hopefully your
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CPA replies back, no, what are you talking about? But anything less
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than that and you might want to worry. And so that's the same thing.
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They could just ask their CPA, Hey, how's my basis? Or
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do I have a negative basis? Is? That is as simple as that
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to maybe start to educate oneself. Yeah, I don't want to get too
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much into the weeds. But you technically can't have negative basis. But the
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thought is okay, if if I have very poor basis, yes, ask
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your accountant. Do I have enough basis? Am I having to pay taxes
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on my distributions? Capital gains taxes? I? Do I have enough basis
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to take them? I don't want our listeners to sen an uneducated email,
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So strike negative basis, but basically say it again if you want to find
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out if you have if you have basis issues? Am I paying capital gains
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on my distributions? Yep? Do I have adequate basis to take these distributions
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out of my practice? Nice? Or do I have adequate basis to take
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Section one seventy nine deductions? I'm planning on I'm planning on buying a piece
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of equipment. How's my basis can I take? It's Unfortunately so many practice
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owners they don't know their basis situation, and they don't know if they have
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shareholder loans, and then they're frustrated that they don't know, and it's well,
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you signed your taxes. So again, a lot of those things come
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up and people get can get frustrated, but you know, ultimately a simple
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email hopefully we're replied back to and you know, one business day you can
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at least feel a little better. Or if you're doing that here in the
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first quarter of twenty twenty four, at least you're having that conversation now instead
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of the of this year and being frustrated again with tax surprises or issues like
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that. Yeah, all the time, our clients are emailing us asking us,
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I need to replace this piece of equipment and then we'll talk with the
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planning team. How can they take this deduction? Yeah, go ahead and
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do that, pay for it, and that deduction goes on their taxes.
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Getting that information before dropping six figures on a piece of equipment's probably a good
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idea. Yes, yeah, I mean it's fascinating how many folks don't.
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And I know we're already in twenty twenty four, but at the end of
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twenty twenty three, a lot of clients were asking is it beneficial to go
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ahead and do it this year or wait till next year. We'll take a
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look at that's case by case, right, So many people want a blanket
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answer on these things, and you know, it's very specific to your situation
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exactly, and we track basis for our clients so we can come back and
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say, yeah, it's fine, go ahead and do that. Now,
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let's wait until January, first quarter, it'd be better to do it.
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Then, let's say one hundred people end up. I mean I talked to
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hundreds and hundreds. But let's say you look at one hundred different taxes in
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a given year of people that are going through our process, how many would
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you say have basis issues and don't know about it. I would say probably
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half have basis issues. I was gonna guess that felt high, but I
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would say half, and probably most of them don't realize. I don't think
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I've heard one person go oh yeah, yeah, no, I'm aware of
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my basis issues and I've had those for X amount of time. Never heard
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that. And most of the time with a shareholder loan, a few people
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there's a unique reason why they might have it, and that they are aware.
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We can appreciate that. But yeah, from a shareholder loan, I
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would ask you, I think maybe thirty thirty five percent have shareholder loans that
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aren't aware, but maybe a coin flip half have basis issues, and most
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aren't aware, right, yeah. And I've even seen practice owners not realize,
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not realizing that they're paying capital gains taxes on those distributions. When we
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look at their taxes, I'll mention, hey, a couple of years ago
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or the past couple of years, you've been paying taxes on these excess distributions,
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and they'll be like, what, don't understand that. So so often
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I hear, well, I feel this or I feel that. So when
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they feel they're not making as much money as they think they are, they
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should This could be one of the reasons why. Yeah, yeah, they're
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unnecessarily paying taxes on necessary distributions. And it really it all ties in the
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entity structure then allows you certain benefits and advantages. And then when you have
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this, then you also need to be aware of aware of basis. But
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as long as somebody's tracking it, it's it shouldn't be a big deal,
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right. I mean, if if you have a CPA that's tracking it,
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aware of it, but half are just that that's an interesting's tests. We
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see such supports standard of care for practice owners in tax specifically, and this
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is one of those. Ye know, well, how's your basis? It's
22:07
all jacked up. After I emailed my guy, well there's your sign as
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you know, as Jeff Foxworthy would say that, Bill Ingle, Bill,
22:19
your taxes might be jacked up if you have basis problems. I think that's
22:25
a stretch on my attack, comedic attempt. But it's interesting. This topic
22:30
is relatively unknown or unclear to a lot of practice owners. It's not necessarily
22:37
complex, but it is challenging so much of what we do here. Yeah,
22:41
when Kevin first mentioned it doing a podcast on it, just kind of
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nodded and smiled. I was like, uh huh, that sounds great.
22:48
Well, and it is great, but again, like I not was one
22:52
hundred percent before this. And for for us looking at, all we really
22:56
need is to look at your most recent tax return and your most recent set
23:02
of financials. To you, this stuff jumps off off the page. If
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they have a shareholder, loan or basis issues, it just jumps off the
23:08
page. And it's hard for us to understand. Number one, how a
23:12
dentist would tolerate that for so long, but most of the time they don't
23:15
know it. And then for why in the world is an accounting firm not
23:21
better? Yeah, like shareholder loan and basis is kind of should be some
23:26
chip shot one on one stuff, but it's pretty mangled a lot of times.
23:29
Yeah, those are two main items with that S Corp. Election that
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you need to make sure you're tracking paying attention to because you're you're losing a
23:41
lot of the benefits to being an escort if you don't, yeah, know
23:45
your basis, that was your that was your softball speaking a basis, Casey,
23:52
We're going to be in San Antonio and Tampa very very soon. Please
23:56
go to four Quadransadvisory dot com slash events. You can check it out and
24:00
learn more about shareholder loans and basis and uh, what kind of moisturizer case
24:04
he uses? That'll be a good one. Cuticle cream, cuticle cream.
24:07
Yeah, and I think he was covering some other bases, Kevin, You're
24:11
like, wait, this isn't making oh bases, Yes, just covering some
24:15
different bases. Yes, It's like me, it stops out of me in
24:18
high school. I didn't get the first base of high school. But now
24:21
I'm rounding home plate, you know what I mean? Kevin, thank you
24:25
so much for being here. I really appreciate you coming in and uh in
24:29
part of your wisdom. You're so smart handsome too, Casey, get that
24:32
mountain dew back in that fridge. You'll be I swear that's all the time
24:37
we have today. Thank you to our guests for their insight and for sharing
24:40
some really great information, and thank you to you the listener for tuning in.
24:44
The Millionaire Dennis Podcast is brought to you by four Quadrants Advisory to see
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