Salary and Distributions

[ElephanHat]

Tim Thanks for the response. I'm throwing myself to the wolves by saying this, but I think I only understood about 1/2 of what you said so I'm reading up on the remainder. That being said, I'm wondering if I mis-stated something or we're not on the same page.

The hospital paid her S-Corp ~$150k as an advance on the loan, it's sitting in her S-Corp's bank account. So lets say she paid herself a salary of $12k/month
for the first 3 months. At that point the S-Corp still has $114k in the bank account, which is actually enough to pay the remaining 9 months salary of her employee (herself). Why would she have to take a loan from the S-Corp if she wanted to take a quarterly distribution of say $20-30k? Additionally, she'll still receive monthly payments from the hospital totaling ~$275k for the year.

I also realize I should be asking these questions to my accountant and paying for advice so I really, really appreciate all the comments I've received even if some of them are a bit of tough love.

[Tim]

Tim Thanks for the response. I'm throwing myself to the wolves by saying this, but I think I only understood about 1/2 of what you said so I'm reading up on the remainder. That being said, I'm wondering if I mis-stated something or we're not on the same page. The hospital paid her S-Corp ~$150k as an advance on the loan,

it's sitting in her S-Corp's bank account. So lets say she paid herself a salary of $12k/month

for the first 3 months. At that point the S-Corp still has $114k in the bank account, which is actually enough to pay the remaining 9 months salary of her employee (herself). Why would she have to take a loan from the S-Corp if she wanted to take a quarterly distribution of say $20-30k? Additionally, she'll still receive monthly payments from the hospital totaling ~$275k for the year.

I also realize I should be asking these questions to my accountant and paying for advice so I really, really appreciate all the comments I've received even if some of them are a bit of tough love.

Why did the S-Corp not make her an advance on a forgivable loan? Same terms as the hospital.
Why not directly? I don’t see why the forgivable loan cash
isn’t 100% available. If it’s a forgivable loan calling cash in a bank account and moving some at 50% is a charade. Maybe the business substance needs to be the actual transaction. She takes a loan and is taxed on the forgiveness.
The loan contract is what gives her the right to $150k and to pay tax on the forgiveness terms.

The entities and comp from the partnership have zero impact.

[ElephanHat]

If it’s a forgivable loan calling cash in a bank account and moving some at 50% is a charade.

This is the crux of my concern.
I'm not sure what shell game the CPA thinks we can play with this money and I honestly don't think it's worth delaying payment on 50% of it for the possibility of saving a couple thousand dollars in taxes, which I don't even think is possible with the loan.

The strategy somehow involves pre-paying taxes during the loan assistance period so we're not taxed in a higher tax bracket when the loan is forgiven while at the same time generating revenue/collecting salary.

Right now this feels like one of those stories of a wrongfully convicted prisoner who studies law for decades to exonerate himself. At the end of this saga I'm determined to understand what's going on, but right now I have no idea.

It's also worth noting that my wife is at least the third parter in this practice to go through this loan program. So the comment earlier about the other partners situations being totally different isn't entirely true. There's a lot of similarity.

[Tim]

“Like 1-5k a year in tax savings.”
$150k loan that’s a max tax savings of 1 f’ing percent.
Subtract both opportunity costs (keep it safe in T-bills at 4% or payoff debt) and the subtract his fees for his advice.
Congrats! Your wife is just another catch.

As mentioned, some here have expertise to run the S-Corp numbers. A one year tax savings is the tax tail wagging the dog.
The way to approach the group is that this isn’t an investment in the CPA , it’s getting second and third opinions. That potential leads to sharing tax and entity strategies.
Using independent insurance agents makes sense, same for CPA’s. Not a thing wrong with competition.
It’s just business.

[ElephanHat]

The forgivable loan is about $550k over two years.
$150k is just the advance

[Tim]

The forgivable loan is about $550k over two years.
$150k is just the advance

Fill in the blank. $400k go. The structure of the loan, draws and forgiveness are important.
I can build a rationalization that she is taxable as soon as she can receive funds.

How important is this? A recent political figure spent time in jail for “tax planning”, cash available papered as a forgivable loan. The terms of this obviously require specific performance, so I am not adverse to the transaction. I am adverse to artificially restricting access only for tax.

Smells wrong with no business purpose or advantage.
My response to a tax attorney would be like “Is this the best you got? I want the cash ASAP and delay the forgiveness or smooth it.”

[Zaphod]

My wife is the the one who wanted to just do what everybody else in the practice was doing so she didn't appear to be difficult to work with or going against the advice of her peers. So despite me wanting to just go the LLC route, I would be going against her wishes. I value her opinion and it's worth more than $2k a year to make her happy. We've never formed an LLC or S-corp so going the S-Corp route allows us to leverage all the other partners' experience when dealing with taxes. It also allowed us to find a CPA without having to shop around. Do I still want to shop around? Yes and we probably will after a few years.

Regarding my original question. I did some more research and found an old blog post by Dr. Dahle about how much to pay yourself as an S-Corp and it talked about a 50% rule of thumb. I'm thinking back to the conversation I had with our CPA and I recall him misstating her monthly income to be $13,000 when it is actually $23,000. So I think he may have said she should pay herself $6,000/month because of that mistake. We're going to pay her slightly over half the $23,000 a month and call it good. I'm still hoping we can get an answer on taking an early distribution payment.

Lastly, regarding Zaphod, I don't think it's a terrible deal. She gets a loan that pays her about the market rate as "salary". She's not working full time but she does take call an equal amount as the other partners. The non-profit that runs the loan program also provides her with all startup expenses up to $350k/year for the first two years. Seems like a pretty nice deal to me and a great way to help docs get started in private practice.

You can search these forums and all around, talk to others, these setups are weird, wholly unnecessary and usually arent as expected in the end. Thats all I meant, who knows yours could be good, but as a type of gig, these are to be avoided in general. Practice gets a ton of benefit with zero risk to them, which just sets up a bunch of bad precedent and ofc avenues to abuse, which is what usually happens.

[ElephanHat]

Tim The loan payout is structured to mimic a salary. Paid out about $23,000/month over 24 months. But to help with getting started they front load it for the first 3 months. $100k, $50k, $13k, $13k, $13k, ectc..., month 13 goes back to $23k, 23k, 23k...

Forgiveness is then monthly over the following 3 years at 1/36th of the total loan.

They also have an expenses part of the contract. I won't bore you with the detail son that, but they will reimburse 100% expenses up ~$700k of expenses over the 2 years. I feel like this portion of the contract will be underutilized because most of the clinic is already furnished and equipped. (My wife is stepping in for someone who retiring) I'm thinking we should remove all their older equipment and replace it with stuff that is the ownership of my wife's S-Corp so that if she were to leave or, god forbid, be asked to leave, she could legally take it with her. Their equipment is still good, but it's property of the parent S-Corp. (It's a Hub and Spoke S-Corp configuration)

Zaphod Thanks for the insight. I'll read up and make sure my wife is aware of the risks so she can try to avoid getting taken advantage of. So far everybody has been great but ever since someone tried to sell me Whole Life Insurance in Med School my defenses have been up. (I didn't buy it, it led me to finding this site/community). My main takeaway so far is that all the partners are too trusting of this CPA. Hopefully for good reason but time will tell. For now, we'll go with the flow - within reason.

[Tim]

So two years of subsidy and 3 years repayment.
Basically to subsidize 2 years of anticipated earnings taking time to build up. The add on forgiveness schedule tied her up for a total of 5 years. AND you add in potential additional equipment.
Comes down to $100k over 5 years.
So she is making $375 per year for 5 years.
It has been mentioned that about $400k is when S-Corp makes financial sense.
Seems like your income comes into play as well. Did the CPA consider your combined income? I doubt it. Cookie cutter solution potentially deferring income from lower marginal tax rates to a higher marginal rate.
I really suggest you get some real personal tax advice. What you paid for was off the shelf, not tax planning.

BTW, the CPA is very glad to have a new client to replace the other or might milk them for shutting down the S Corp.

Full disclosure: This may be absolutely the correct choice. If you haven’t seen numbers on a MFJ basis, insufficient data.

[ElephanHat]

So two years of subsidy and 3 years repayment.
So she is making $375 per year for 5 years.

On the 3rd year she is just a normal partner and earns income based on the whole RVU structure they have set up. Which should be around $400k/year. So she will be generating $400k in revenue while at the same time having about $183k of income in the form of forgiveness.($550k loan forgiveness/3 years) Loan forgiveness is contingent on her remaining in the geographic area and continuing to practice.

So possibly ~$583k/year for 3 years then back down to $400k when the loan has been completely forgiven. I'm lucky enough to have lots of pre-tax options at work and am going to be funneling nearly all my income into 403b, 457b, Dep care FSA, and HSA. Which is another reason why I want this money now.

[Tim]

On the 3rd year she is just a normal partner and earns income based on the whole RVU structure they have set up. Which should be around $400k/year. So she will be generating $400k in revenue while at the same time having about $183k of income in the form of forgiveness.($550k loan forgiveness/3 years) Loan forgiveness is contingent on her remaining in the geographic area and continuing to practice.

So possibly ~$583k/year for 3 years then back down to $400k when the loan has been completely forgiven. I'm lucky enough to have lots of pre-tax options at work and am going to be funneling nearly all my income into 403b, 457b, Dep care FSA, and HSA. Which is another reason why I want this money now.

Add it to your income and see if the marginal tax rates save you a dime. A two income physician couple has a first world problem for sure. Good luck.

[jfoxcpacfp]

I’m a little confused reading this setup. Are you saying the S-corp is the employee? How is she getting a “salary” and where does the s-corp fit in? In my limited experience, the s-corp gets a 1099 and pays out a salary to the owner/employee. Or is the 9-mo advance separate from the salary?

The 50% salary:dist’s is a ROT that is not written anywhere but is generally understood that the IRS typically won’t pursue an audit if the ratio is here. SR had some additional info last year that this may be changing but it’s a very easy starting point before going further.

Not enough info to answer your question about reasonableness of the salary and taking a distribution this year. Fwiw, if the accountant is charging only $500 for personal and $2,500 for corp returns, I don’t see how he can be spending much “unique” time with each client other than pushing through tax prep and giving cookie cutter answers to the questions asked by each partner. Admittedly, I have not absorbed every word in this thread. Don’t know enough and probably don’t want to go too much further down this rabbit hole, so most of this is mpo.

[ElephanHat]

jfoxcpacfp No the S-Corp is not an employee. The non-profit side of the hospital system is providing the loan, which is a different entity from the for-profit hospital where her private practice contracts with. The for-profit side of the hospital then keeps track of all her clinic visits and surgeries, etc... It's assumed that if she got the loan for $275k/year that she won't generate that much revenue the first two years. If she does exceed certain thresholds then the loan is adjusted to reflect the fact that she generated more and the total value of the loan is adjusted down. The 9-month advance is an advance on the loan, which is paid out monthly.

Regarding salary, my understanding is that by receiving a salary and paying taxes that she can somehow pre-pay income tax on the loan forgiveness so it doesn't get stacked on top of her normal salary/S-Corp distributions in years 3-5. I am very, very confused on this part so it's possible I'm explaining totally wrong but the CPA has done it before for the previous partners that have gone through this program.

To add some closure to my original question, I spoke with someone a the CPA firm who said that distributions from an S-corp are as simple as writing yourself a check. Unlike payroll, you don't have to have any sort of mechanism set up to pay them out. I'm reading up on this whole Stock basis part of the distributions law but I'm not sure how it applies to a newly formed S-Corp. So she's just going to write a distribution check to herself. (The one stipulation they gave me was to not do monthly distributions or anything that appears to be a salary)

[Tim]

S corporations, in general, do not make dividend distributions. They do make tax-free non-dividend distributions unless the distribution exceeds the shareholder's stock basis. If this happens, the excess amount of the distribution is taxable as a long-term capital gain.

Distributions made by an S corporation are not subject to Social security or Medicare taxes.

If you need help with S corp shareholder distributions, you can post your legal needon UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.
https://www.upcounsel.com/s-corp-sha...-distributions

Ask the CPA about the basis being used to report capital gains.

“In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs.”

I have papered many corporate tax advantageous structures. In every case I could say that the structure was designed to reflect the appropriate taxation of the business transactions.

It is unclear exactly what taxes you are saving, avoiding or delaying. Smoke and mirrors without the details.

[MSooner]

Joining a partnership is like a marriage, not beneficial to make trouble by going against the flow unless you absolutely have to do so. Going with everyone else's CPA and their recommendations in most cases is just being a good partner.

Have you been in a business partnership before? I have and I like to keep the peace and choose my battles very carefully.

How common is it to use the same accountant for business and personal taxes in a situation like this? We chose not to (because the group’s accountant made us uncomfortable during the partnership buy in process) and it seems a little too trusting to only have one set of eyes on all the money flowing through this setup with no other oversight. Yet the majority of the partner’s use the practice’s accountant because “it’s easier” and we were pushed multiple times to as well.