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The Shareholder Loan Trap: What Dentists Don’t Realize They Owe · The Millionaire Dentist™

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  Hello, everyone, welcome to the Millionaire Dentist podcast, brought to you by
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  four Quadness 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 to the Millionaire Dentist. I am
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  your host, Jared Bridgeman, and we've got a hot new episode for you.
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  And in in studio I have our CPA Kevin Rton. Casey Hires is
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  not in today. Kevin, I brought you in today to speak to not
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  only myself, but to our audience as well about shareholder loans. Yes,
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  you do, that's absolutely and that's the thing. You're like an expert on
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  this right Actually, yeah, you know, we see shareholder loans quite a
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  bit in the console process. A lot of prospects coming in, you know,
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  see that, and that can be definitely a red flag. And we
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  have a lot that. It's surprising how many, how many practice owners are
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  oblivious to actually even having them, right, So, I mean a lot
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  of these people they if they don't know they have one? Do they even
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  know what it is? After you pointed out? So, can you kind
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  of walk me through what a shareholder loan is? Yeah? So for practice
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  owners, you have the business, the practice itself, and then the owner
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  the individual, and it's a loan that's in between the practice and the owner.
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  Uh. And for according to the tax code, that needs to be
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  treated like a third party kind of that arms length transaction in terms of it
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  having the word loan and the verbage there. It would be an expected it's
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  paid back with interest. Yes, And so there's two ways. Obviously,
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  the practice can loan money to the shareholder or vice versa, the shareholder can
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  loan money to the practice either way. Again, it needs to be set
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  up correctly with a promisory note with interest, you know, with payments things
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  like that. That's what the IRS says, Okay, So why would an
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  owner not know they even have one? How does that even happen? Because
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  a lot of times transactions, whether it's distributions or money taken out or money
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  put into. Most of the time the red flag comes in with money that's
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  taking out taken out of the practice by the shareholder, and buy will say
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  numerous reasons shoddy accounting, or it could just be that the practice owner does
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  not have someone like us that's working with them throughout the year. They just
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  have their tax prepayer and they give them all the information, all the money
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  that they pulled from the practice throughout the year. Here, fix my tax
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  returns, and then they'll be like, Okay, you did this wrong,
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  but we can hide it here. What is the perceived benefit that people think
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  they're going to get out of putting any distributions into a shareholder long Why do
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  they think that's the better option to bypass capital gains tax on excess distributions.
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  So another key phrase here is tax basis. Shareholders have tax basis that has
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  to be tracked in their ownership of the practice. And if they pull money
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  out, if they take distributions in excess of tax basis, that creates a
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  taxable transaction taxbile event. To bypass that, they'll say, oh, it's
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  not a distribution, it's just a shareholder loan that all quote unquote payback or
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  you know, will pay back at a later time, and then it will
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  just sit on the balance sheet to by bypass. Right, there is there
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  a time when let's say we're talking to We're looking at a an owner in
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  the sixties or seventies and they're ready to retire and close down their practice,
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  and they're not applying the bars, but they have a large shareholder loan,
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  haven't really paid attention to it. What happens if they close down their practice
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  with install with that money. So yeah, that's actually a really good question
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  and a good point because if that's sitting on the balance sheet when it's time
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  to uh to sell the business, that nets against you know, the value
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  of the practice and can can will lower how much money you get from some
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  one of those things where if if you're taking a shareholder loan or you're accounting
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  and put it under there, you're kind of saying like this is this is
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  future Kevin's problem. Yeah, it's not my problem now, it's a future
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  problem. Yeah, But then you're also throwing up red flags potentially for the
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  IRS. That's right, Okay, you know, for there is a line
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  on the tax return that four and eleven twenty s if you're an es corp,
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  that on the schedule L line seven that the RS requires you to Okay,
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  So so this is talking about Okay, so if you don't have if
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  you don't know if you have one or not a shareholder loan. This this
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  would be one of the places you can find this. Yeah, so you're
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  looking at if you're an a S corp yep, and you're looking at section
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  seven of your tax your tax return. It's it's on the schedule L.
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  It's on a fourth page of the tax return. I'm getting probably too deep
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  into the sure, but it's reported. The IRS wants you to report loans
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  to shareholders because they want to see that and a lot of times so you
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  can look there also on the balance sheet, you know, if your balance
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  sheet should show in the assets section loan to shareholder. We've actually also seen
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  where accountants will actually hide a shareholder loan on a different line, uh,
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  a other current asset so to speak, and just a loan receivable. So
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  that's even more negative at that point, it's even worse of a thing to
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  do. Yeah, the holder loan. Yeah, I kind of feel like
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  that's hiding the shareholder alone, because you know, the IRS, if if
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  they see a shareholder loan, like I said, they want to see that
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  that's being paid off and they want to make sure that it's set up like
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  a loan that it's just not an amount being again hidden on the tax return,
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  and if it's if it's just sitting somewhere else, that can definitely be
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  a big red flag. IRS can come in and deem those not a shareholder
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  loan, deem it a distribution and if it's a significant amount, you could
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  pay ten percent of that amount in taxes plus penalty. Is an interest going
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  back to whenever that originated. So let's say someone's out there listening right now.
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  Uh, they're taking a look at their return right now and saying,
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  oh, shoot, I do have one. You know you may they may
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  not have looked at it because they pay their their standard CPA. If it's
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  on there, what do you what do we suggest should happen with that?
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  What are there steps that they may not know to do to pay it back?
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  Or so what we do you know, when new clients come in sign
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  up, we start working with them. There's multiple ways that we can look
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  at tackling that and fixing that. One way, if it is a true
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  shareholder loan that we want to set up, then then yeah, we need
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  to set up a promise wordy note. We need to make sure it looks
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  like can note you'd get from a bank or from someone else. Is that
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  similar to like the promise rings that the Jonah's brothers used to wear, anything
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  like that. No, No, not at all. Yeah, it's more
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  business term like you would get from a bank or in those institutions. Yeah
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  so, but yeah, in monthly payments, start paying that back. Now,
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  if it's something where okay, in the past you did move distributions as
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  show it as a shareholder loan, we'll start knocking that down as as we
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  help with increasing that basis. Does it need to be retroactively, uh,
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  have an interest added to it. Let's say it should have had a X
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  percentage amount. We don't necessarily go that far. Yeah, that's most we
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  deal with it going forward. It's too much of a red flag to to
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  go back, but we'll we'll definitely start knocking it out going forward. And
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  when the when the ir S sees that, okay, this they're they're chipping
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  away at this issue or they're working on it, then then that's definitely a
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  plus. Okay, okay, I'm on my tax return. Holy shit,
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  there's a shareholder loon. I had no idea about this. How do I
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  confront my accountant? First? I'd say, what is this? If you
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  have no idea, what is this? What we do is okay, I
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  want to see multiple years tax returns, multiple years financials, even get into
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  the gl the actual transactions, what transactions make this up, and really want
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  to dig into what that was. Sometimes we've seen where practice owners will take
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  a pretty big lump sum out to purchase a building. Maybe they you know,
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  they they now bought the practice, and then a few years later they're
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  purchasing the practice of the building itself. Then they'll take a pretty big distribution,
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  pretty big amount from the practice checking and set it up as an inner
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  company that sort of can be a little bit different, but can be the
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  same as a shareholder loan. If you're taking money out personally to put a
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  down payment on a building, that can be treated the same way. So
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  this would be one of the times you would say it seems worthy to do
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  a charrelder loan. We actually usually say no, we want to get away
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  from shareholder loans. It's just with the tax advantages to an ES corp.
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  That is actually something that can and can put in jeopardy your ES court status
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  if that's not handled perfectly, and especially that's a whole nother trip. Yeah,
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  to work with you know, es corps are known for being a pass
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  through entity, so there's no double taxation. If you put that into jeopardy,
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  that that can be huge tax consequences. And and then if you have
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  multiple doctors that own multiple shareholder loans, that can get into unequal unequalness distributions
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  things this. I just read recently that the author of Rich Dad, Poor
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  Dad is one point two billion of debt right now, how do I do
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  that? That sounds like just like a bunch of free money? How do
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  I get away with that? And then just uh, maybe you could just
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  file Maybe you can just file for bankruptcy or something. Go hide, go
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  hid somewhere, Kevin. I wanted to thank you so much for being on
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  here. Is there any other last notes that you have for for our listeners
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  out there? When it comes up with the shareholder loans? Just the usual
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  go look at your tax returns, Go look at your financial statements that hopefully
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  you're getting from your accountant tax preparer, and look for those circlos. If
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  you don't know that you have them, and you see them, ask them
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  about it. Better yet, come and ask us about them. And that's
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  right. I mean, you can go on you can give us a call,
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  you can go on our website and fill out a form and we'll reach
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  out to you. So four Quadrantadvisory dot com is a good place to go.
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  We're gonna be in a few areas coming up pretty soon. We're going
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  to be in San Antonio. That's in Texas. Kevin I like Texas.
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  We're going to be doing some events there as well as leading up to Tampa
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  and then Nashville. If you'd like to come and see us in person and
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  maybe hear more about ways you you know, we help with our accounting,
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  with our thing, with our financial team. Go to four Quadrantadvisory dot com
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  slash events and register. You don't know what you're missing out on. Food,
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  bourbon, golf, all kinds of stuff. It's pretty sweet. Bris
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  get down and brisk, get down in Texas. Thanks Covin, Thank you.
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  That's all the time we have today. Thank you to our guests for
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  their insight and for sharing some really great information. And thank you to you
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  the listener for tuning in. The Millionaire Dennis podcast is brought to you by
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  four Quadrance Advisory to see if they might be a good fit for you and
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  your practice. Going over to four Quadransadvisory dot com and see why year after
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  year they retain over ninety five percent other clients. Thank you again for joining
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  us, and we'll see you next time.