Deducting practice expenses from income guarantee/loan forgiveness 1099

[GEAUXT]

Hey y'all, long time lurker. This place is a wealth of knowledge.

 

So here's my question...

 

I will be starting practice next week in a private practice (1 other physician) and will be doing so with a hospital income guarantee contract. The contract is very standard, as far as these go, with signing bonus, income guarantee, and certain expenses covered each month. The term is 12 months, and the forgiveness period is 24 months following the end of the guarantee period. The money will be paid directly to me, and I will be paying the group my portion of practice expenses.

I understand how the loan forgiveness works, with the 1099 as income. My big question is that when taxes come due over the next several years (1/24th of loan forgiven each month) will I be able to deduct the money I paid the group for my portion of practice expenses? Just an example: let's say the total I am "loaned" over the 12 month period is $200,000. Half of that is salary, and half of that is my portion of expenses. When the loan is forgiven I will have $200,000 in "income". However, only half of that money was actually income, the rest was expenses. I would assume that all the expenses could be written off?

 

Thanks for any help!

[jfoxcpacfp]

Congratulations on your new position. Yes, you will be able to net the expenses out against your net 1099 income profits less 1/2 FICA tax. This will also be a good opportunity to set up a SOLO-k and roll over any pre-tax retirement plans to it.

Interesting screen name. We raise miniature geauxts on our farm.

[GEAUXT]

Thank you so much for the quick response. I'm glad to see I'm not totally in the dark trying to figure all of this out. I had talked to my grandfather, who is also an accountant, and he also recommended the Solo-k.

As for the screen name, I'm a Louisiana boy and an LSU alum so we do enjoy our "eaux's".

 

I really appreciate the help!

[lilsnappa]

GeauxT, fellow LSU Alum here *internet high five*

I'm reviving this long dead thread to see how this turned out for you or any others that have used this type of incentive. My wife has been offered a similar contract with a regional hospital (in Louisiana). There's a solo private primary care practice that's looking to expand and the local hospital is sweetening the pot with 1-Year guaranteed income, Sign-on bonus, completely paying off her student loans, and moving expenses.

I've read a few other threads that are wary about these income/incentive guarantees, but I've run through a quite a few different scenarios and they all are in our favor financially - with the caveat that if we leave the area in the next 3 years we'd have to pay any forgivable amount back, prorated by month.

For reference, here are a few other threads on this subject:

https://www.whitecoatinvestor.com/forums/topic/salary-guarantee-is-actually-a-forgivable-loan/

https://www.whitecoatinvestor.com/forums/topic/income-guarantee-loan-tax-question/

https://www.whitecoatinvestor.com/forums/topic/private-practice-interview-questions/page/2/

The biggest risks I've read from other threads are 1) The practice doesn't manage the agreement with the hospital appropriately 2) the new doc leaves the area before the contract is completed and has to repay whatever part of the "loan" is forgiven 3) The new doc gets up to speed quickly and is bringing in more than the income guarantee.

What am I missing and what else should we be thinking about?

[jfoxcpacfp]

Lol, this one seems like so long ago!!!

Since @geauxt originally posted, JCTA has removed moving expenses as a tax deduction, so you would not be able to w/o those expenses against the reimbursement. There are always risks, up to you to decide if the reward is worth the risk. Complete loan payoff sounds like a pretty decent reward (depending on what the balance is, of course).

Definitely take advantage of setting up a solo-k should your wife accept this position. It would not be conducive to a home office, of course, given the nature of the income.

[lilsnappa]

The sign on bonus + student loans + moving expense is in the $130k.

She will be an employee of the private practice, and the hospital will pay the practice the guaranteed income + plus some expenses + incentives. I will be reviewing/auditing the monthly reports on my wife's behalf to make everything is done correctly.

The hospital will receive all of her gross collections for the first year and at the end of that year will "forgive" the difference between what was collected and the amount they paid out.

That forgivable amount will then be amortized over 24 months and we will receive a 1099 each month for 1/24 of the forgiven amount.

Is there still a way to have a solo K under this situation?

[Tim]

“3) The new doc gets up to speed quickly and is bringing in more than the income guarantee.”

Strike this as a risk factor. Exchanged for safety.
Of course, you could request the “guarantee” be removed and go pure production. I would not suggest it.
I would suggest a little push back on the three year forgiveness, 3 to 1 just seems a little much. The loan payoff for 3 years is great, anything else should be the length of the guarantee.

[lilsnappa]

Tim wrote:

I would suggest a little push back on the three year forgiveness, 3 to 1 just seems a little much. The loan payoff for 3 years is great, anything else should be the length of the guarantee.

Click to expand...

The way the contract is structured is: 12 months period of income+expenses-gross collections. At the end of the 12 month period, the difference will be assessed and the forgivable amount determined and we will pay taxes on that amount. If at any time we decide to leave the area, we will have to pay back what was forgiven.

So it's only a 1 year contract, but we need stay in the area for 2 more years to reap the entire benefit.

[Tim]

“So it’s only a 1 year contract, but we need stay in the area for 2 more years to reap the entire benefit.”

That’s the disconnect. Two years handcuffs with no further benefit. Reverse the commitment.
Forgiveness after 4 months. 3:1 ratio the other way.
One year forgiveness. Point of discussion.

[pulmdoc]

I have posted repeatedly on income guarantee agreements and why they are (almost) always a bad idea for the physician to sign up for one, but its worth going over (and over) because they are complex and its easy to get the wrong idea of what is going on.

In my mind, income guarantee agreements should be initiated by the physician because the geographic service is where they want to be no matter what (eg hometown). Any agreement where the physician is persuaded to come is an inherently risky proposition for the physician.

The crux of an Income Guarantee contract between physician and hospital is that the hospital sorely needs X speciality but due to curcumstances such as rural location are unable to recruit. Income Guarantees have specific parameters which must be in force to provide a safe harbor against Stark violations (cash for hospital referrals) such as documented need, underserved status, and loan repayment.

Income Guarantee agreements provide an income floor while the physician is getting their practice off the ground, but to avoid Stark compliance issues they cannot provide "excessive" compensation. The guarantee contracts I looked at used MGMA median as their contract amount. This means you are going to a (generally) undesirable area without being paid well, at least not at first.

The way that Income Guarantees work is that the physician is guaranteed a certain monthly income floor. Make less than that floor for the month, hospital cuts them a check. Above the floor, no check. So if the guarantee is $240k/year, that's $20k/month and any months with net income >$20k no money changes hands. Once the guarantee period is over (usually 6-24 months) the physician is on their own financially and the forgiveness period kicks in. This is usually 2 years/1 year guarantee, so if you are going this route I recommend the shortest guarantee period possible to reduce the forgiveness period. The minimum allowable forgiveness period under Stark

I don't think Income Guarantee agreements are terrible for SOLO practitioners; if they want to be there, then its some insurance against running out of cash before the practice is viable. They can't be run out of town because they are on their own so if they decide to leave it's 100% up to them.

What I STRONGLY advise against is joining an existing practice on an income guarantee model. Why? Because you have 2 masters with non-aligned goals and the opportunity for disaster is high. Sign an income guarantee agreement, and your new group knows you have huge financial pressure not to leave, worse than if you bought that McMansion when you came to town. Let's say you sign up with a group and have a typical 1+2 agreement. 12 months in, your guarantee period is up. $100k to be forgiven but all is well, you think. Then the group tells you that you're now in charge of all the ED call for the group and you'll be doing Saturday clinic every week that will be all Medicaid/uninsured patients. Unfair? Absolutely! What are your options? Suck it up and get screwed for 2 years, leave and write a $100k check, or quit the practice and open your own practice to compete against an established referral base, and with no income guarantee to protect you. Extreme? Perhaps. Possible? Absolutely, and making this sort of mistake is financially and emotionally devastating for a physician. Other ways a practice can screw you during an income guarantee; demanding restrictive covenants (not allowed to force you to leave geographic area per Stark but that won't stop them from trying, making you feel like you can't leave), intentionally sending your clinic all the uninsured patients on the premise that they'll get a check from the hospital either way and therefore inflating the amount you owe, declining to make you partner while your forgiveness period is still in effect. Therefore, if you get offered a position with an existing group with Income Guarantee, run fast and run far and don't look back.

[pulmdoc]

Because my previous wall of text wasn't long enough...

An Income Guarantee from an existing practice does not sweeten the offer, it does the opposite. The signal from the practice owner is "I want you to run the financial risk of your coming here, not me." If the practice can't support 2 physicians, you're the one with the fat loan not him/her. If they REALLY wanted to recruit they could offer a guaranteed salary, but if you're willing to take a loan from someone else instead of salary why would the existing practice turn that down?

The only part of the "bonus" that is worth the money quoted is the signon bonus. Student loan forgiveness handcuffs you while simultaneously you have to pay taxes on the amount forgiven. $200k in student loan repayment may only be worth $125k once you figure in taxes. Better to take a job that pays $40k/yr more and pay off the loans yourself without the handcuffs.

[lilsnappa]

pulmdoc, I appreciate the sage words of wisdom. I actually linked a few of your threads in my previous response to let you and the other posters know I've researched a good bit before reviving this thread.

First, this opportunity is the in the geographic location we want to be, and we expect to stay in the area beyond this contract (near family/hometown). My wife and I are aware of the risks and have discussed the many downsides of an arrangement like this. We have even gone so far as to talk about other options with the existing practice (solo practitioner), and she is open to other employment options. It is really up so us which direction to go.

But the more I run the numbers (I'm a business management consultant/analyst), the harder it is for me to look past the fact that we could potentially receive ~$100k or more in financial benefit from this deal - even including the extra tax burden for the 2 years post. We have a level of trust with the practice she is joining and have spent quite a bit of time sitting down talking over potential problems that may arise. The hospital has an incentive to assist financially as they need Primary care docs in the area (specifically peds).

Many of the potential pitfalls you stated arise around the practice screwing the employee. Completely agree with you that those are reasonable examples. But in any business transaction, there needs to be a level of trust. After many conversation, we trust the practice is not going to screw us. So why not take advantage of the guaranteed income + incentives? I'm not being facetious, I'm honestly looking for someone to shoot holes in my argument.

[Tim]

@pulmdoc,

4 major academics and another Hosp offer have guaranteed income for two years (some have incentive s too). No repayment mentioned. Repayment only on signing bonus.

The first two years are relatively standard for most new attendings. I believe your position regards any repayment requirements. Correct?

[pulmdoc]

The primary reason not to take the income guarantee is that it handcuffs you to the area. What if in 2 years your dream job cold calls you? What if the hospital administration changes and your wife wishes her death stares actually work?

Let me also reiterate something that is not immediately obvious: YOU ONLY MAKE MORE MONEY WITH AN INCOME GUARANTEE IF THE PRACTICE IS A FAILURE, AND EVEN THEN THAT'S ONLY DURING THE GUARANTEE PERIOD. What normally ends up happening when these agreements work the way they are supposed to is that the hospital's guarantee covers the first few months of backlog between date of claim and AR. Once the first month's billing starts getting paid, the amount paid by the guarantee shrinks rapidly. Once you are fully running, all the guarantee has done is shifted your tax obligation to a future year (not likely a good thing). Now, if the practice fails to launch and month after month it takes a guarantee check from the hospital to keep things afloat, it's nice to have those checks, but you're still facing the reality that those checks are going to end and you have a practice that is below par financially which you can't leave for multiple years afterwards.

Tim, there is a massive difference between an employed position with either PP or academic where the employer guarantees a salary and the Income Guarantee arrangement being discussed. I have 0 qualms about a new doctor signing an agreement where the employer guarantees a certain income+incentives, often with an "eat what you kill" setup after a certain period of time. In that case, the guaranteed income is the doctor's to keep, period. It is not a loan, which is how Stark REQUIRES Income Guarantee arrangements between hospitals and doctors to be run. Employer guarantees also incentivize the employer to do due diligence that patient volume justifies the new hire.