Should my practice be an S-corporation?

For many practices the answer is yes once professional income crosses the point where the payroll cost of a reasonable salary is outweighed by the self-employment tax saved on distributions. The decision also depends on your state's professional entity rules and on how retirement plan contributions interact with your compensation. It is worth revisiting whenever income changes materially.

Is a defined benefit or cash balance plan worth it for a practice owner?

High, steady, concentrated income is exactly the profile these plans are built for, because contribution room scales with age and income in a way a standard plan does not. They add administrative cost and an actuarial commitment, so they suit owners whose income is stable and who want to set aside more than a standard plan allows.

Does it make sense to own the building my practice operates in?

Often it does, held in a separate entity that leases to the practice. That structure can open cost segregation on the real estate and separate an appreciating asset from operating risk. The lease must be written and priced at market, because related-party rent is one of the first things an examiner tests.

When should a multi-location group consider a management company?

When several locations share administrative functions, a management company can centralise them and clarify ownership. The arrangement only holds up if the fees reflect real services at defensible prices. Building it to hit a tax number rather than to reflect substance creates exposure rather than savings.

How does the timing of an equipment purchase affect my taxes?

Expensing rules can let you deduct much of an equipment cost in the year the asset is placed in service. Whether a large purchase lands in one tax year or the next can change the current-year result significantly, so the timing is worth planning deliberately rather than leaving it to a delivery date.

Tax Strategy for Healthcare Practice Owners

Healthcare business owners — practice owners, multi-location groups, pharmacy owners, and physician-owned service companies — typically overpay because high professional income arrives through a structure designed for a solo practitioner. The highest-leverage moves are entity and management-company structure, retirement plan design at high income levels, cost segregation on owned clinical real estate, and correct treatment of equipment purchases.

By practice type: Dental practices, Physician practices & medical groups, Pharmacy owners, Physical therapy, chiropractic & med spa.

Key points

Practice structure tends to be set once at formation and never revisited, leaving a solo-sized retirement plan in place as the practice grows.
Reasonable compensation for owner-physicians is a recurring examination issue because the incentive to minimise salary is obvious.
A management fee set to hit a tax number rather than to reflect services actually rendered is a problem waiting to be found.
Holding practice real estate in a separate entity that leases to the practice can open cost segregation, but the lease must be written and priced at market.
Expensing rules can deduct much of an equipment cost in the year the asset is placed in service, so timing across a year boundary should be planned.

Why do businesses in this segment overpay?

Clinical training is long and financial training is largely absent, so the structure of a practice tends to get set once at formation and never revisited. Income is high and concentrated, which makes retirement plan design unusually powerful — yet a solo plan sized for a single practitioner is often left in place long after the practice has grown into something much larger.

Professional entity rules vary by state, and the alphabet of forms — professional corporation, professional limited liability company, professional association — discourages owners from restructuring even when the numbers plainly call for it. Equipment is expensive and depreciable, and the timing of a large purchase across a year boundary is frequently accidental rather than planned.

Multi-location groups compound the problem. They accumulate entities over time without anyone stepping back to model how the group as a whole should be organised, which leaves related-party arrangements and real estate holdings sitting in whatever shape they happened to grow into.

Which strategies matter most here?

Requires capital outlay

Some of the levers above need cash to fund; the others are elections, timing, and compensation design. A plan separates the two.

What does the IRS look at in this segment?

Reasonable compensation for owner-physicians is a recurring examination issue. The incentive to minimise salary is obvious, and the Service is well aware of it. Management-company arrangements between related entities must have economic substance and defensible pricing — a management fee set to hit a tax number rather than to reflect services actually rendered is a problem waiting to be found.

Related-party transactions between a practice and an owner's real estate entity draw attention, as does personal use of practice-owned vehicles and equipment. These are the areas where clean documentation, written agreements, and market-based pricing separate a defensible position from an exposed one.

What changes as you grow?

At the smaller end, the questions are entity election and retirement plan sizing. As a practice grows into multiple locations, the group-structure question begins to dominate, and real estate ownership usually enters the picture.

At the largest scale the work shifts toward succession, buy-in and buy-out structures for incoming partners, and asset protection. This is the tier where a generalist preparer is most obviously out of depth, because the questions stop being about the current year's return and start being about the shape of the enterprise for the next decade.

Common questions

Should my practice be an S-corporation?: For many practices the answer is yes once professional income crosses the point where the payroll cost of a reasonable salary is outweighed by the self-employment tax saved on distributions. The decision also depends on your state's professional entity rules and on how retirement plan contributions interact with your compensation. It is worth revisiting whenever income changes materially.
Is a defined benefit or cash balance plan worth it for a practice owner?: High, steady, concentrated income is exactly the profile these plans are built for, because contribution room scales with age and income in a way a standard plan does not. They add administrative cost and an actuarial commitment, so they suit owners whose income is stable and who want to set aside more than a standard plan allows.
Does it make sense to own the building my practice operates in?: Often it does, held in a separate entity that leases to the practice. That structure can open cost segregation on the real estate and separate an appreciating asset from operating risk. The lease must be written and priced at market, because related-party rent is one of the first things an examiner tests.
When should a multi-location group consider a management company?: When several locations share administrative functions, a management company can centralise them and clarify ownership. The arrangement only holds up if the fees reflect real services at defensible prices. Building it to hit a tax number rather than to reflect substance creates exposure rather than savings.
How does the timing of an equipment purchase affect my taxes?: Expensing rules can let you deduct much of an equipment cost in the year the asset is placed in service. Whether a large purchase lands in one tax year or the next can change the current-year result significantly, so the timing is worth planning deliberately rather than leaving it to a delivery date.

Sources

Mena Hemaia, CPA, CIA

Chief Executive Officer, Accountack — West Palm Beach, Florida

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