Loss Every Year, Audit Risk?

[Maria]

My friend is a manager of a private-held medical practice with ten physicians. It is a California C corporation. The practice terminated their previous long-term CPA. The new CPA adviced them that there could be audit risk since the business has loss every year. From what I heard, the previous CPA zeroed out the corporation's profit every year by giving physician "bonus" at the end of the year. I thought it makes sense since the PSC's tax rate is 35% and none of the physicians is in the highest marginal tax bracket. Therefore, I wondered why the new CPA said so. Is he trying to increase the shareholder's stock basis? Thanks.

[JoshinNC]

Maybe the new "CPA" is just a wuss

My friend is a manager of a private-held medical practice with ten physicians. It is a California C corporation. The practice terminated their previous long-term CPA. The new CPA adviced them that there could be audit risk since the business has loss every year. From what I heard, the previous CPA zeroed out the corporation's profit every year by giving physician "bonus" at the end of the year. I thought it makes sense since the PSC's tax rate is 35% and none of the physicians is in the highest marginal tax bracket. Therefore, I wondered why the new CPA said so. Is he trying to increase the shareholder's stock basis? Thanks.

and doesn't want to have to argue a perfectly legitimate strategy with an overzealous auditor? Or, maybe he/she is seing some things that would actually raise the organizations audit risk?

Who knows unless you're actually involved in the engagement?

[Golden Rocket]

Audit Risk is Real

The audit risk is real, as the IRS loves to "double-dip" and is using the "reasonable compensation" issue to disallow bonuses which eat into corporate profits.

The recovery for the IRS is not as lucrative as it used to be, since dividends would probably be taxed at only 15%, and the 35% rate could thus be collected only once. But taxation at the individual level has a double-edge for high income taxpayers such as doctors - the AMT. Even though dividends is capped at 15%, they raise all other income levels to where the AMT can carve deeper.

[Maria]

Physicians are not Over Compensated

Hi,

Thanks for the reply. I don't see the physicians are over compensated. Compared to the same speciality acrossed the country, their compensation level is at the low end. I wrote a college paper on their practice two years ago that is why I know this. Their practice are not well managed - expense for everything is high. For example, when the new CPA came on board, they signed a contract for 4 hours of QuickBooks training for $3,500. It is for the office manager who used Quicken before to know how to use QuickBooks for AP. Also, they hire a computer person to install QuickBooks, yes, only to install QuickBooks in their computer, they paid $900. I am so amazed how they spent their $.

[S T]

Physicians are Not Good Business Decision Makers

I have heard over and over again that Physicians can not make "good decisions" when it comes to business finances. I have seen it with 2 different Chiropratic Clients.

Seems like your clients also did not make a good business decision when they paid $3,500 for 4 hours of Quickbooks Assistance or $900 for someone to install.

I am a Quickbooks Pro Advisor and would "love" to be able to charge and RECEIVE those fees, I would quit preparing tax returns!

Sandy

[Maria]

Sandy, I agree with you. I really don't know how other CPAs make their price, it looks outragous to me. And based on what he said, I am a little bit doubtful of his background. Was it too obvious that C corp. profit "shifted" to individuals to pay income tax??? But I am just not sure, totally not sure. That is why I am posting here. He doesn't have a website. We only spoke to a staff once, and she is extremely busy and could only spend 10 mins on the phone with us. By the way, she recorded on QuickBooks year-to-date income statement and balance sheet from previous CPA firm's financial statements, just one big journal entry without class and the doctor paid $1,750. I guess that price included copying previous CPA's chart of accounts.

[les grans]

Isn't this what's *supposed* to happen??

I forget now how it was explained when Congress first saddled us with the QPSC rules, but it seems to me that the flat-rate top-rate corporate income tax for QPSCs was *designed* to encourage a closely-held professional services corporation to pay out all its profits as wages or bonuses to the owner-employees. Seems to me sort of a tautology: if the income of the corporation is from their services, then that's what their services are worth. Or maybe less, if the corporation spends too much for things, like in this case!!

[BOB W]

Why don't the change to an S Corp?????????????

[Maria]

Converted to S Corp.

I thought about it before. Evidently this C corp. is very "old," probably older than the S corp. rule. Over the history, old doctors/shareholders get retired and new doctors/shareholders come on board. It appears to me the transition always occur pretty easy - with S corp, will it be the same easy? Also, they have loss carryforward. Should they use up all loss before the conversion?

I did not suggest anything, since I am not experience enough to help them. The new CPA will have a meeting with the doctors in two weeks. I want to find out what he has to say.

[taxmandan]

I thought about it before. Evidently this C corp. is very "old," probably older than the S corp. rule. Over the history, old doctors/shareholders get retired and new doctors/shareholders come on board. It appears to me the transition always occur pretty easy - with S corp, will it be the same easy? Also, they have loss carryforward. Should they use up all loss before the conversion?

I did not suggest anything, since I am not experience enough to help them. The new CPA will have a meeting with the doctors in two weeks. I want to find out what he has to say.

There may be pension plan reasons for the C-Corp status. I've seen doctors set up elaborate retirement plans with huge contributions that would lose tax advantages in an S-Corp. You need to investigate all of the issues involved before considering a change in entity, including the 100% agreement of all shareholders to elect S status.