Tax Strategy for Physician-Owned Practices and Medical Groups
Physician practices and medical groups overpay through high professional income arriving in a structure built for a solo practitioner: no management company as locations grow, a retirement plan far smaller than the income allows, insurance and reimbursement timing that distorts taxable income, and equipment purchases never planned against the tax year. Entity and management-company structure, retirement plan design, and cost segregation on owned clinical real estate are the largest levers.
Key points
- Reasonable compensation for an owner-physician is what the role would command at arm's length given specialty, hours, and duties, not the lowest defensible number.
- Management fees between related entities must reflect real services at defensible prices rather than a figure chosen to reach a tax result.
- Insurer payments and chargebacks often arrive in a different year than the service, which can push taxable income higher than the economics justify.
- A cost segregation study on owned clinical real estate reclassifies components into shorter depreciation lives, and an engineering-based study is what makes the position supportable if questioned.
- Related-party rent set well above market with no written lease is the kind of arrangement a compliance review flags immediately.
Why do businesses in this segment overpay?
Clinical training is long and financial training is absent, so structure is set once and rarely revisited. Multi-location groups accumulate entities without anyone modelling how the group as a whole should be organised, and the result is a collection of arrangements that grew rather than a design that was chosen.
Insurer remittances and chargebacks create receivable timing that the books rarely reflect accurately, so taxable income is distorted by when payments happen to land. The recurring pattern across physician groups is high income paired with little financial management — overstaffing, uncategorised expenses, and idle cash sitting where a plan could be working — which is exactly the gap a strategy conversation is meant to close.
Which strategies matter most here?
- §162A management company, a holding company, and a management agreementNo outlay
- §401Solo 401(k), SEP, defined benefit and cash balance plansCapital outlay
- §168Accelerating depreciation on buildingsCapital outlay
- §168Immediate expensing of equipmentCapital outlay
- §1366Reasonable compensation for S-corporation ownersNo outlay
- §62Reimbursing owner and employee expenses correctlyNo outlay
- State PTET statutesThe state pass-through entity tax election and the SALT capNo 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 knows it. Management-fee pricing between related entities must have economic substance, not a number chosen to reach a tax result.
Related-party rent between a practice and an owner's real estate entity draws attention; rent set well above market with no written lease is the kind of thing a compliance review flags immediately. Personal use of practice-owned assets rounds out the list of areas where documentation decides the outcome.
What changes as you grow?
At the core tier the questions are entity election and retirement plan sizing. With multiple locations the group-structure question dominates, and real estate ownership usually enters the picture.
At the largest tier the work shifts to succession, buy-in and buy-out structures, asset protection, and the family's estate. This is where a generalist preparer is most obviously out of depth, because the questions are no longer about the return but about the durability of the enterprise and the family's position around it.
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Common questions
- When does our group need a management company?
- Usually when several locations share administrative, billing, or staffing functions that could be centralised. A management company can consolidate those functions and clarify ownership, but only if the fees reflect real services at defensible prices. Substance, not the tax result, has to drive the design.
- How should reimbursement timing affect our tax planning?
- Insurer payments and chargebacks often arrive in a different year than the service, which can push taxable income higher than the economics justify. Accounting method and accrual timing determine how that lands. Getting the books to reflect the real receivable position is the starting point for any accurate plan.
- Is cost segregation worth it on our clinical building?
- If the group owns its clinical or office real estate, a cost segregation study can reclassify components into shorter depreciation lives and accelerate deductions. It suits owned property with meaningful build-out. The study should be engineering-based so the position is supportable if questioned.
- How is reasonable compensation determined for owner-physicians?
- It is based on what the work would command at arm's length, given specialty, hours, and role, not on the lowest number that reduces tax. Because the incentive to understate salary is obvious, this figure is examined closely. Documenting the basis for the salary is what protects it.
- Does the pass-through entity tax help our group?
- In states that offer it, electing the pass-through entity tax can let the business pay certain state tax at the entity level, which changes how the deduction flows through to the owners. Whether it helps depends on your state's rules and each owner's situation, so it should be modelled before electing.
Sources
Mena Hemaia, CPA, CIA
Chief Executive Officer, Accountack — West Palm Beach, Florida
If you want to know which of these apply to your business specifically, that is a conversation about your actual numbers — not a seminar example.
Or start with the Free Cash Clarity Audit — A no-cost review of where your business stands and what a planning engagement would target — the firm's own named starting point.
20 minutes with an Accountack advisor. If a technical review is worth your time, the next step is a workshop with Mena — and if there is nothing material to do, he will say so.