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Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. He is also a financial writer for several dental journals. You may contact him at 609-502-0691 or at Bryenb@baratzcpa.com.
What can these assets be? This is really not a trick question when you analyze what assets a dental practice transition encompasses.
What are the assets that are not included in the methodologies employed by professional CPAs or CVAs when preparing dental practice valuations? Let’s look first at what is being sold when the dental practice is transitioned. Here are some but not all of those assets: Goodwill of either the dental practice and/or the practitioner’s personal allocation is probably the major item being sold in terms of value of the dental practice. While not on the books unless a previous dental practice was acquired by the one being sold, it can represent 75% to 80% and sometimes more of the amount of the allocation of the sale price. This asset will be on the settlement sheet of the transition and will be of primary importance from a tax consideration for the buyer and the seller of the dental practice. Any equipment, supply inventory and prepaid items will also be on the settlement sheet of the transition unless specifically agreed upon in advance of the closing of the sale. So the question remains, what assets are not on the books or part of the transition agreement that are valuable to the seller and the buyer of the dental practice?
In many cases, the terms under consideration regarding “cash or accrual basis,” may not be fully understood by the dentist but are extremely important when filing tax returns, reporting income and paying taxes. They also are necessary to comprehend when knowing what is being sold from the dental practice. It is almost always understood that a dental practice will be structured to report its revenue and expenses on what is known as the “cash basis” of reporting. That means that the money that is received from patient services is reported as income and the bills that are paid are reflected primarily as expenses. The difference between what is collected and what is paid is most often reported as net income to the dental practice. There are certain adjustments that take place prior to filing the tax returns but the definition of a “cash basis” dental practice is primarily: cash collected is income and bills paid are expenses. For an explanation of the “accrual basis,” dental practice reporting, it includes all of its billings to patients and all of its collections as income. It adds all of the bills it pays and all of the bills it owes as expenses. From this explanation, the dentist can see that to be on a “cash basis” of reporting, the accounts receivable and the accounts payable are not included. The cash that has been collected has already been reported as income.
It is incredibly rare to have an “accrual basis” dental practice since it means that the dentist is reporting income from his or her billings and collections. It also means that the dentist is paying tax on those billings before the funds have been received. Taxes will be due without the funds allocated to that income to pay the tax since the billings have not yet been turned into money in the bank. The large majority, probably in the 98% to 99% range, based on this writer’s experience, of all dental practices use the “cash basis” of reporting so they do not report their billings as income until the funds are collected. That means that the billings to the patients or insurance companies (accounts receivables) are not on the books of the dental practice and must be negotiated as part of the transition on a separate basis. Since the cash collected by the dental practice has already been reported as income (it is on the books of the dental practice) that also would not be included in the sale of the dental practice assets. If it was, it would mean that the cash in the bank would be taxed twice. It was already subject to tax when it was collected and if sold with the practice assets, it would be subject to tax again.
When negotiating the transition of the dental practice, it is important to know what is being sold and the allocation of those assets. An experienced practice evaluator will also instruct the dentist how to negotiate the other valuable assets not on the books or on the books and already subject to tax