The end of the calendar year is a celebration time for most American practices, but June 30 also marks the end of the fiscal year for Australian veterinary practices. With the IRS ruling 92-65 (see JAVMA, Vol. 201, No. 6, September 15, 1992, JAVMA, Vol. 206, No. 3, February 1, 1995), sections 471 and 446 of the Internal Revenue Code, and the IRS “Audit Technique Guide for Veterinary Medicine” (see JAVMA, Vol. 212, No. 11, June 1, 1998), it appeared that accrual accounting was here for tax reporting purposes. Recent rulings have greatly softened that! Many practices have also started to review their corporate structure each year (this is the law in most States and Provinces). Mid-year and the last quarter of every year is the time to review certain business items, for management concerns as well as corporate charter requirements. The owners of a veterinary practice should hold a meeting EVERY year and review fourteen basic business areas (listed below).
Most corporations (and most LLCs) are required to hold an annual meeting of stockholders. The date and time of the meeting are generally set forth in the by-laws of the corporation, and the announcement of the meeting can be waived in writing by the attendees. Even when there is no corporate structure, the annual meeting is needed to review the preceding year’s operations and to develop a program-based budget and operations plan for the year to come. For that matter, due to the dynamic nature of a program-based budget (client centered – as in the statement – “the front door must swing”), the system requires at least quarterly trend review at the leadership level of the practice.
The list provided below represents items that need to be considered by the key decision- makers and managers of any veterinary practice, large animal or small, specialist or generalist, corporate or privately held. While it is not an exhaustive list, it outlines matters that are relevant to the business of veterinary practice. In many cases, minutes of these discussions are particularly important in cases of a lawsuit or Internal Revenue Service examination.
- Financial Assessment of Balance Sheets and Income Statements of preceding year; conduct a fiscal analysis of the practice operations
- Election of Directors/Officers, if corporate
- Prior year compensation formulas
- Next year staffing needs and compensation formulas
- Deferred compensation plans (and other retirement packages)
- Loan status
- Banking needs and support assessment
- Extraordinary corporate actions (legal structure demands, e.g., IRS 92-65)
- Fringe Benefits (health insurance, medical reimbursement plans, CE)
- Document Review (tax returns, investment reports, state licensure, etc.)
- Compliance Review (trade name, COBRA, I-9s, OSHA, ADA, DEA, FDA, employment laws, discrimination policies, and other record keeping needs)
- Proper use of practice name and logo (corporate name and mark)
- Short-term Planning (program-based budgeting, income center to cost center, marketing needs, facility space reallocation, communication plan, transition plan for year, etc.) – PEST before SWOT is a smart process.
- Long-term Planning (three-year business plan, renovations, expansions, etc.) – use a CFP for best results when investment planning, especially in this current bull market (bear market is expected soon).
- Update/refine the operational CoA with income and expense centers
The importance of making the above decisions, as well as recording them, cannot be emphasized too much. The joint discussions get the team on the right track and integrate the business of operating a veterinary practice with the quality of health care delivery. They do go together!
A corporation can lose its corporate status and thus its limited liability as a result of neglecting these matters. On an audit, an IRS agent will ask to inspect the corporate minutes, and if matters are not in order, such as the proper recording of a loan to an owner/officer, the IRS could deem the loan a taxable cash dividend. Another common example of the importance of maintaining corporate minutes is the proper recording of increases or bonuses to key employees, so that the IRS doesn’t regard this as a dividend and therefore tax it twice.
MID-YEAR TAX REVIEWS ALSO NET POSITIVE RETURNS
To get ready for the end-of-year planning process, mid-year reviews are beneficial, especially for tax purposes. This can be done concurrent with the quarterly review of the program-based budget by the practice leadership, but this tax position review must also look forward and center on greater tax liability forecasting. The following concepts need to be discussed with your accountant, preferably at mid-year, so there is maneuvering space:
* Review of withholding and estimated tax payments (e.g., must be at least 90% of 1994 tax bill)
* With your CFP, make retirement plan contributions (e.g., IRA, SEP, 401 (k), Keogh, etc., provide accumulated tax-free earnings until withdrawal)
* Maximize deductions (e.g., medical over 7.5% of adjusted gross, miscellaneous over 2% of adjusted gross)
* Check out tax-favored investments (depends most on overall financial picture)
* Donate to charity (e.g., unneeded treasures to charity for Fair Market Value (FMV) deduction)
* Restructure your debt (e.g., home-equity loan is one of last remaining tax write offs, unlike credit cards, car loans, and other consumer debt)
* Plan equipment purchases (e.g., equipment deduction versus depreciation) – often called the Capital Expense Budget.
* Estimate your tax bill accurately (especially important for sole proprietors, partners, and Sub-S corporations)
* Shift income and deductions (e.g., defer income or accelerate tax deductible expenses – but if done every year, such as a large end of year drug purchases, only effects the first year)
* Review tax deductions:
- Inventory (Cost of Goods Sold). Businesses that sell or manufacture products can deduct the cost of goods sold.
- Employees’ Pay. You can deduct any amounts you give your employees for compensation in cash, property or services.
- Employee Benefits. Benefits like health plans, adoption assistance, educational assistance, and life insurance for your employees are generally tax deductible.
- Profit-Sharing or Pension Plans. You can deduct contributions you make to your employees’ SEP, SIMPLE, 401(k) and other qualified plans.
- Auto Maintenance and Mileage. There are two ways to calculate vehicle deductions: standard mileage rate or actual expenses (such as gas, repairs and maintenance). You may use the method that results in a larger deduction on your tax return. Track your total auto expenses as well as business mileage so your tax advisor can help you to calculate the maximum deduction on your tax return!
- Utilities. The water, power, trash, and telephone bills at your office are all 100 percent deductible as regular business expenses. If you have a phone number that has a mix of
* Write off bad debts promptly (e.g., deductions can ONLY be taken in year when it officially becomes worthless)
* Realistic business meals and entertainment
* Don’t overlook tax credits (e.g., targeted job credits)
A veterinary practice can lose its focus on the business of practice as well as on the healthcare delivery quality and client-centered service; there is an integrated system when doing program-based budgeting. The accountant should be skilled at the above tax issues, and be able to convert your cash-based daily operations to accrual for tax purposes only, but most accountants don’t understand the veterinary practice programs which produce the income; program-based activities require leadership from a veterinary professional.
During these post GFC (recession recovery) times, there are many practice owners who have started to focus so tight on the bottom line that they have lost sight of the client and patient needs. There are also many associate veterinarians and other staff members (usually very underpaid) who have lost sight of the business, and in their caring, have given away the practice net. This annual mid-year and year-end exercise allows both perspectives to be addressed, and requires a consensus on the integration for the coming year. Wouldn’t that be nice in your practice?