Strategies for Individual Wealth Management: Key Tax and Financial Considerations for Individual ASC Owners Robert Crigler, CPA President / Chief Operating Officer Mariner Wealth Advisors, LLC Steve Goodman, CPA Managing Director The Goodman CPA Group
Strategies for Individual Wealth Management:
Key Tax and Financial Considerations for Individual ASC Owners
Robert Crigler, CPA President / Chief Operating Officer Mariner Wealth Advisors, LLC
Steve Goodman, CPAManaging Director The Goodman CPA Group
Agenda
1. Tax Rates2. Phantom Income3. Tax on Sale of ASC Interests 4. Retirement Planning/Plans
o 401 k plans o Cash Balance Plans
Federal Tax Rates
2015 Income Tax Brackets The Federal income tax has 7 tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The amount of tax you owe depends on your filing status and income level. It's important to realize that moving into a higher tax bracket does not mean that all of your income will be taxed at a higher rate.
Federal Tax Rates
Individual Taxpayers
Federal Tax Rates
Married Individuals Filing Joint Returns
Additional Federal TaxesAdditional Medicare Tax on Wages, railroad retirement (RRTA) compensation, and self-employment income over certain thresholds:Employers are responsible for withholding the tax on wages and RRTA compensation in certain circumstances. Additional Medicare Tax went into effect in 2013 and applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012.
• Medicare Tax on earned income is 0.9 % on income of $250,000 (Married Filing Joint); on earnings of $200,000 (Single)
Net Investment Income Tax:
The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status
• Net investment tax of 3.8 % on income of earnings of more than $250,000 (Married Filing Joint); on earnings of more than $200,000 (Single) and generally includes income such as:
Interest,Dividends,Capital gains,Rental and royalty income, andNon-qualified annuities.
NYS Tax Rates
Married Filing Joint ReturnsIncome Marginal Tax Rate
$0+ 4.00%
$16,450+ 4.50%
$22,600+ 5.25%
$26,750+ 5.90%
$41,150+ 6.45%
$154,350+ 6.65%
$308,750+ 6.85%
$2,058,550+ 8.82%
Individual Returns
Income Marginal Tax Rate
$0+ 4.00%
$8,200+ 4.50%
$11,300+ 5.25%
$13,350+ 5.90%
$20,550+ 6.45%
$77,150+ 6.65%
$205,850+ 6.85%
$1,029,250+ 8.82%
NYC Tax Rates
Married Filing Joint Returns Individual ReturnsIncome Rate
$0 to 12,000 2.907%
$12,000 to 25,000 3.534%
$25,000 to 50,000 3.591%
$50,000 to 500,000 3.648%
$500,000 + 3.876%
Income Rate
$0 to 21,600 2.907%
$21,600 to 45,000 3.534%
$45,000 to 90,000 3.591%
$90,000 to 500,000 3.648%
$500,000 + 3.876%
Phantom Income
Partnerships, LLCs and S Corporations
Partnerships, limited liability companies (LLCs) and S corporations are all what’s known as “pass-through” entities. That means they are generally not taxed themselves, as C corporations are. Rather, their owners are taxed. Each owner receives a Form K-1 that reports his or her appropriate share of the income (or loss) even if that income is retained by the business and not distributed to the owners. You are generally obligated to report on your tax return the amount attributed to you on Form K-1. Whether you received any payout is really irrelevant to the tax question.
Phantom Income
Phantom Income is created by the following:
1. Principal Loan Payments2. Capital Lease Payments3. Working Capital Reserve4. Future Equipment Reserve5. Depreciation
Phantom IncomeReal Estate or Practice Income
Year 1 Year 2 Year 6
Cash Income from Operations
2,000,000 2,250,000 3,400,000
Principal payments on debt
(560,000) (585,000) (700,000)
Cash Available for Distributions
1,440,000 1,665,000 2,700,000
Taxable Income on K-1
2,000,000 2,250,000 3,400,000
Principal Loan & Capital Lease Payments
Phantom IncomeReal Estate or Practice Income
Year 1 Year 2 Year 6
Cash Income from Operations
2,000,000 2,250,000 3,400,000
Working Capital / Equipment Reserve
(400,000) (200,000) (200,000)
Cash Available for Distributions
1,600,000 2,050,000 3,200,000
Taxable Income on K-1
2,000,000 2,250,000 3,400,000
Working Capital Reserve & Reserve for Equipment Purchases
Phantom IncomeReal Estate or Practice Income
Year 1 Year 2 Year 6
Cash Income from Operations
2,000,000 2,250,000 3,400,000
Depreciation (400,000) (400,000) (64,000)
Taxable Income on K-1
1,600,000 1,850,000 3,336,000
Cash Available for Distributions
2,000,000 2,250,000 3,400,000
Depreciation
Assumptions: $2.5MM Leasehold Imp & $2MM Equipment purchase
Phantom IncomeReal Estate or Practice Income
Year 1 Year 2 Year 6
Cash Income from Operations
2,000,000 2,250,000 3,400,000
Principal payments on debt
(560,000) (585,000) (700,000)
Working Capital / Equipment Reserve
(400,000) (200,000) (200,000)
Cash Available for Distributions
1,040,000 1,465,000 2,500,000
Depreciation (400,000) (400,000) (64,000)
Taxable Income on K-1Phantom Income
1,600,000560,000
1,850,000385,000
3,336,000836,000
Taxable ASC InterestsPe
rce
nt (%
) Pe
rce
nt (%
)
Perc
en
t (%
) Pe
rce
nt (%
)
M inority In te res t
Single-Specialty
50
M ajority In te res t
Single-Specialty
50 50%
40 40
30
20
11%
10
26%
21% 21%
16%
5%
30 20
20%
10
10%
20%
2.0- 3.0- 3.5- 4.0- 5.0- 6.0- 4.0- 5.0- 6.0- 7.0- 2.9x 3.4x 3.9x 4.9x 5.9x 6.9x 4.9x 5.9x 6.9x 7.9x
M ulti-Specialty
50
M ulti-Specialty 50
52%
40 38% 40
30
20
10 9%
19%
5%
19%
5% 5%
30
20
10 9%
13%
22%
4%
2.0- 2.9x
3.0- 3.4x
3.5- 3.9x
4.0- 4.9x
5.0- 5.9x
6.0- 6.9x
7.0- 7.9x
4.0- 4.9x
5.0- 5.9x
6.0- 6.9x
7.0- 7.9x
8.0- higher
Multiples of EBITDA: Sale of ASC Interests 2014 Survey
Source: Healthcare Appraisers 2014 Survey
Taxable ASC InterestsMultiples of EBITDA: Sale of ASC Interests 2015 Survey
M in o rity In te res t
Single-Specialty
C o n tro llin g In teres t
Single-Specialty
50 50%
50
41% 40 40
30 30 29% 25% 24%
20 20
13% 10
6% 6% 10
6%
2.0-
2.9x
3.0-
3.4x
0%
3.5-
3.9x
4.0-
4.9x
5.0-
5.9x
6.0-
6.9x
4.0-
4.9x
5.0-
5.9x
6.0-
6.9x
7.0-
7.9x
M in o rity In te res t
Multi-Specialty
C o n tro llin g In teres t
Multi-Specialty
50 70 67%
60 40
33% 50
30 27% 40
20 20% 30
10 7% 7% 7% 11% 10 6%
0%
2.0- 3 .0- 3 .5- 4 .0- 5.0- 6.0- 7 .0-
2.9x 3.4x 3.9x 4.9x 5.9x 6.9x 7.9x
5.0-
5.9x
6.0-
6.9x
7.0-
7.9x
8.0-
higher * Does not total 100% due to rounding * D oes not to tal 100% due to rounding
Source: Healthcare Appraisers 2015 Survey
ASC Statistics
ASC Life Cycle
(4.0)
(2.0)
-
2.0
4.0
6.0
8.0
10.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Years
$ (
in m
illio
ns
)
REVENUE EBITDA
START UP GROWTH MATURE DECLINE
Source: Reed Smith LLP & HealthCare Appraisers presentation
Taxable ASC InterestsScenario 1 Scenario 2 Scenario 3
Sale Price (Redemption of Units)
500,000 500,000 500,000
Partner’s Capital Account Balance
160,000 160,000 160,000
Partner’s Outside Basis
50,000 -0- -0-
Accounts Receivable(FMV Partner’s share)
80,000 120,000 -0-
Total Gain on Sale 290,000 340,000 340,000
Capital GainOrdinary Income
210,00080,000
220,000120,000
340,000-0-
Today’s Objectives
• Gain an understanding of the basics of financial planning and how a company’s compensation and benefit programs can add to your financial well-being
• Gain an understanding of basic investing concepts and how to develop your investment plan
• Identify the actions you can to significantly enhance your financial well-being
The Value of a Financial Plan
A financial plan will help you to clarify:• Your financial goals
• Strategies to achieve the goals
• Specific steps to implement the strategies
Areas to Explore
• Saving• Managing debt• Insurance• Investing• Education funding
• Retirement funding• Pre-retirement
planning• Incapacitation
planning• Estate planning• Company stock
ownership
What Do You Want?
• Set your financial planning goals
• Each goal will have its own horizon– For the period of accumulation– For the period over which it will be spent
• Start with broad ideas and work toward increasingly specific and measurable goals
Life’s Financial Trade-Offs
23
CURRENT NECESSITIES FUTURE NECESSITIES
CURRENT EXTRAS FUTURE EXTRAS
Basic shelter, food
clothing, transportation
and medical care
Basic shelter, food
clothing, cash for emergencies
and nursing home care
L arger home, private
college, retirement travel,
bequests/charity
New kitchen, new car,
vacation, family gifts
Trade - offs
Debt Ratios
• Housing expense ratio– Housing expenses (mortgage, taxes and
insurance) should not exceed 28% of gross income
• Debt to income ratio– Total consumer debt (not including mortgage)
should be less than 20% of net income
Warning Signs of Too Much Debt
• Unable to save 10% or more of gross income• Habitually pay only the minimum monthly
payments on your credit cards• Borrowed from one lender to pay another• Unable to figure out how much you owe• Would be in immediate financial trouble if you
lost your job tomorrow
Conquering Debt
• Stop borrowing• Start using a debit card• Prioritize your debt repayment• Seek lower rates• Determine the maximum you can pay• Repay highest cost debt first• Continue paying the maximum
Key Saving and Investing Concepts
• Saving versus investing• Combining saving and investing• Saving and investing early• Tax-deferred saving and investing• Tax-deductible saving and investing• Saving and investing using employer
contributions
Investing Post-tax (Taxable)vs.
Investing Pre-tax (Non-Taxable)
Yearly Amount InvestedAfter-tax
Yearly Amount InvestedPre-tax
Investment $200,000-80,000 = 120,000 200,000
Effective Interest Rate 2.5% 5%
After 5 Years $631,123 $1,107,694
After 10 Years $1,346,186 $2,529,263
Retirement PlanningCase Study – Small Medical Practice
Source: Goldleaf Partners
Owners (2) contribution: $297,960
Employee (4) contribution: $14,568
Tax Savings: $125,011
Net cash out flow: $187,517
Retirement PlanningCase Study – Midsize Medical Practice
Owners (2) and Highly Compensated Employee (1) contribution: $273,700
Employee (8) contribution: $64,980
Tax Savings: $135,472
Net cash out flow: $203,208Source: Goldleaf Partners
Retirement PlanningCase Study – Midsize Ambulatory Surgery Center
Source: Goldleaf Partners
Retirement PlanningCase Study – Midsize Ambulatory Surgery Center
• Highly Compensated Employees (13) contribution: $2,431,750
• Employee (12) contribution: $206,986
• Tax Savings: $1,055,494
• Net cash out flow: $1,583,242
Strategies for Individual Wealth Management: Key Tax and Financial Considerations for
Individual ASC OwnersTake Away Thoughts:1. Partnerships, limited liability companies (LLCs) and S corporations are all
what’s known as “pass-through” entities and are taxed at the owners tax rate.
2. Federal tax rates are currently as high as 44.3%: i. Ordinary rate 39.6%;ii. Additional Medicare tax on earnings 0.9%;iii. Net Investment Tax 3.8%.
3. NYS tax rate is currently as high as 8.82% .4. NYC tax rate is currently as high as 3.876%.
Combined NYS/NYC highest tax rate 12.696%.
Combined Federal & NY highest tax rate 56.996%
Strategies for Individual Wealth Management: Key Tax and Financial Considerations for
Individual ASC Owners
Take Away Thoughts:5. Phantom Income is typical in most Partnerships, Limited Liability
Company’s (LLC), and S-Corporations. Prepare for the tax consequence early.
6. Consider the tax consequence on the sale of the ASC interest you hold. Capital Gain tax rates are as high as 23.8%; Ordinary rates are as high as 56.996%.
7. Evaluate your personal financial position. Can you retire when you’re ready? Are your estate goals in place? Consider talking to a financial advisor.
8. Reduce taxes by establishing a 401k Plan combined with a Cash Balance Plan for your practice, Group, or Center.
QUESTIONS
Robert Crigler, CPA President / Chief Operating OfficerMariner Wealth AdvisorsMadison, NJ(973) [email protected]
Steve Goodman, CPAManaging Director The Goodman CPA GroupMarlboro, NJ(732) [email protected]
The Goodman CPA Group