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Questions for CPA About Surgery Center Buy-In

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  • Questions for CPA About Surgery Center Buy-In

    My husband and I are meeting with an accountant this afternoon to go over the offer sheet from a surgery center we're buying into (potentially). We've never done this before, so I'm wondering if there are any important questions I need to make sure to ask her during our meeting? Is there any information I need to make sure we leave the meeting knowing?

  • #2




    My husband and I are meeting with an accountant this afternoon to go over the offer sheet from a surgery center we’re buying into (potentially). We’ve never done this before, so I’m wondering if there are any important questions I need to make sure to ask her during our meeting? Is there any information I need to make sure we leave the meeting knowing?
    Click to expand...


    Yes, there are many questions, but that is the CPA's job: to ask questions of you and to educate you regarding important information you need to obtain from the current owners. She should explain to you what you need to look for and explain the important areas of the offer and why they matter. If the owners have had an appraisal performed, that may be useful. If others have bought shares in the past, you will have some basis for determining the fairness of the offer. If you are the first partner, the pricing will be more subjective. Would be helpful to know how the seller determined the sales price, too. If they have overpaid for the surgery center or spent too much in building it, the price should not reflect their poor decisions (but it likely will). There is more, depending upon the facts of the deal, but, again, that is the CPA's job.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      The most critical part of a business like this is the people you will be in business with.

      The second most important part is how the business breaks up as it eventually will. Know what happens if you want out or if someone else does or if the business stops making money due to regulatory changes or whatever.

      The third most important part is the price. It's practically an art form to figure out how to value something like this. Lots of methods and all have their pluses and minuses, but the bottom line is the less you pay the better your return on the investment. Lots of risk, but many doctors have done quite well with stuff like this. Of course, many doctors have also lost their shirts with stuff like this. Don't leverage up your purchase too much and don't invest money you can't lose.
      Helping those who wear the white coat get a fair shake on Wall Street since 2011

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      • #4
        Probably ought to have an attorney review the agreement as well, not just an accountant.
        Helping those who wear the white coat get a fair shake on Wall Street since 2011

        Comment


        • #5
          The CPA we met with today said interest on the loan we're getting to buy-in to the surgery center probably wouldn't be tax deductible, because the K1 income will be listed as ordinary income. Is that right? I was under the impression we'd be able to deduct the interest on the loan that we're getting to buy-in.

          Comment


          • #6
            Let's see.......

            1) What specialty is the surgery center? GI, Ophthalmology, General surgery, Sleep center or something else

            2) Is it 100% physician owned or partly (usually 51%) owned by a bigger entity?

            3) How many procedures/month or year?

            4) What is the average facility fee?

            5) What is your share of the procedural volume?

            6) Is the distribution equal?

            7) What is the EBTDA (Earnings Before Taxes, Depreciation and Amortization) of the center for the past two years?

            8) Is there a bad debt?

            9) Have you reviewed last 2-3 years of tax returns of the center?

            10) Is there a major equipment upgrade/renovation/expansion planned in the next 5 years?

            11) How is the buy in structured? Is it equal share among physicians?

            12) Are there senior physicians with higher shares/power?

            13) Is the buy in amount some magical number or standardized formula used for every new partner?

            14) Is buy in amount calculated based on past 12 months EBTDA x no. of months?

            15) Are your partners offering loan from the group? Generally, medical financing runs about 4% (depending upon amount...higher the amount, higher the interest) but some groups offer reasonable loans to oncoming partner (within acceptable IRS limits for interest.....and it will not be 0% interest).

            16) No tax deduction on buy in loan....you're buying stock in the company.

            17) What's the break even point? In other words, when do you expect to take home some profit?

            18) Is buy in document simple (2-3 pages without amendments/attachments) or extensive contract?

            19) If the surgery center is associated with a bigger entity and physicians are co-partners (usually 49% share), do you have to have a contract with the larger entity? If so, there might be a lengthy contract and it needs to be reviewed carefully.

            20) Are you planning to buy a home or refinance soon? If so, the new "business" will affect your credibility and may even cause issues for mortgage approval.

            21) Your posting indicates "potential" buy in...what do you have in mind that makes it potential? Is it the buy in amount, or you may move or both?

            22) Do you anticipate competition from other surgery centers?

            23) What is the expected growth (usually based on past performance)?

            24) Do you anticipate to negotiate contracts with insurances in the near future? Contracts are usually negotiated every couple years. Better negotiation will help you make more money than buy in amount.

            I guess this is enough to make it not simple. Yet hoping to be helpful. Cheers.

            Comment


            • #7
              Of course, your CPA or lawyer will not know any of these.

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              • #8




                The CPA we met with today said interest on the loan we’re getting to buy-in to the surgery center probably wouldn’t be tax deductible, because the K1 income will be listed as ordinary income. Is that right? I was under the impression we’d be able to deduct the interest on the loan that we’re getting to buy-in.
                Click to expand...


                Not exactly. The interest is deductible as "investment interest". The catch is that, to use the deduction, you must offset it with investment income. The definition of investment income does not include investment income that is subject to preferential tax treatment (i.e. dividends and LTCG). Fortunately, you can make an election in any year in which you have this category of income to disregard the preferential tax treatment and use it to offset the investment interest, but you have to be proactive and do this every year applicable. Investment interest carries over indefinitely.
                Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                Comment


                • #9
                  Thank you @jfoxcpacfp, that is essentially what our CPA said, but it seems a little clearer when I see it written out like that.

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                  • #10
                    Hope this question isn't too basic. I'm going to be investing in a surgery center as well and need to know whether it's more advantageous from a tax perspective to do so thru my Scorp or thru my personal account. My understanding is that if I do it as a 'personal investment', then I only pay capital gains on the quarterly distributions. If I do it through the Scorp, then I have to pay my marginal rate as it all gets passed through (assuming I can't offset it with expenses). Open to any clarification on this matter, thanks!

                    Comment


                    • #11




                      Hope this question isn’t too basic. I’m going to be investing in a surgery center as well and need to know whether it’s more advantageous from a tax perspective to do so thru my Scorp or thru my personal account. My understanding is that if I do it as a ‘personal investment’, then I only pay capital gains on the quarterly distributions. If I do it through the Scorp, then I have to pay my marginal rate as it all gets passed through (assuming I can’t offset it with expenses). Open to any clarification on this matter, thanks!
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                      That's not a basic question. You should, in general, not put an appreciating asset inside a corporation. The reason is that, if you remove the asset from the corporation, you will pay capital gains taxes on the asset as if you had sold it. For example, the S-corp purchases the surgery center and you later decide to retire but keep the surgery center as an investment (assuming the contract allows for that). The only way you can separate the ownership of the surgery center from the S-corp is to pay taxes on the appreciation in value since the date of purchase.

                      The tax treatment of distributions and your annual apportionment of profit or loss will remain the same whether they pass through the S-corp or directly to you.

                      fyi, in the future you'll get more responses if you start a new thread. I doubt it mattered for this question, as it was a fairly narrow topic, except it w/h/b easy for me to miss  .
                      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                      Comment


                      • #12







                        The CPA we met with today said interest on the loan we’re getting to buy-in to the surgery center probably wouldn’t be tax deductible, because the K1 income will be listed as ordinary income. Is that right? I was under the impression we’d be able to deduct the interest on the loan that we’re getting to buy-in.
                        Click to expand…


                        Not exactly. The interest is deductible as “investment interest”. The catch is that, to use the deduction, you must offset it with investment income. The definition of investment income does not include investment income that is subject to preferential tax treatment (i.e. dividends and LTCG). Fortunately, you can make an election in any year in which you have this category of income to disregard the preferential tax treatment and use it to offset the investment interest, but you have to be proactive and do this every year applicable. Investment interest carries over indefinitely.
                        Click to expand...


                        @jfoxcpacfp

                        I am in a similar situation. I bought shares in a surgery center on 3 different occasions over the past 3 years (majority of those on a loan from a bank) and have been paying ordinary income tax on the distributions from those shares. I am about to file taxes for 2016 (extension deadline coming up). My question is: do the distributions from those shares qualify as "investment income"? If they do, and therefore make the investment interest tax-deductible, how do I specify that when filing the returns in TurboTax? Finally, how do I account for the investment interest from the previous 2 tax-years on which I haven't claimed any deduction so far?

                        Thank you so much for your help!

                        Comment


                        • #13






                           
                          Click to expand…


                          @jfoxcpacfp

                          I am in a similar situation. I bought shares in a surgery center on 3 different occasions over the past 3 years (majority of those on a loan from a bank) and have been paying ordinary income tax on the distributions from those shares. I am about to file taxes for 2016 (extension deadline coming up). My question is: do the distributions from those shares qualify as “investment income”? If they do, and therefore make the investment interest tax-deductible, how do I specify that when filing the returns in TurboTax? Finally, how do I account for the investment interest from the previous 2 tax-years on which I haven’t claimed any deduction so far?

                          Thank you so much for your help!
                          Click to expand...


                          What is the classification of the distributions? I.e. How is the surgery center organized? C-corp, s-corp, partnership?
                          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                          Comment


                          • #14
                            It's an S-corp. Distributions came on a K-1 schedule.

                            Comment


                            • #15

                              1. No, your distributions are not investment income for federal income tax purposes.

                              2. The investment interest should have been claimed in the prior 2 years on form 4952 and carried forward if not offset against any investment income.

                              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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