With the ever-increasing number of rules and regulations that doctors face from several different governing authorities, many doctors just leaving medical school are opting to work for others as employees. However, there are those spirited entrepreneurs who want to run their own medical practice.
If you are one of those independent types about to embark on running your own medical practice, there are a few thoughts your CPA would like for you to keep in mind. Now, if you are buying into an existing medical practice, then we have many different planning ideas to discuss. Our discussion here is for those starting their own practices.
As you have already heard many times, operating a medical practice is so much more than just seeing patients. The practice must be run like any other business where expenses must be watched closely and income must be earned and collected. You may be starting your practice already with a lot of debt from school and life. There is a strong tendency to want to reward yourself for all your hard work to date. Proceed with great caution to avoid getting in over your head with that big house and expensive foreign car. Keep in mind that you will probably need to borrow money for your medical practice, so loading yourself with personal debt will make you look unattractive to bankers while causing a financial burden that can weigh you down mentally.
Before you start your practice, you need to decide many things. From a tax perspective, your choice of taxable entity to run your practice is key. Running your practice as an “S corporation” is often the most advantageous tax wise. However, that decision should come from discussion with your CPA and attorney.
Many doctors starting their practices fail to understand the amount of income tax and payroll tax they face almost immediately. This happens because many doctors are not accustomed to the level of income they begin to earn. It is very important that you have an estimate of the income tax and payroll taxes you are incurring each quarter so that you pay in those taxes each quarter. Falling behind on taxes is a major problem for many young doctors. However, it is more likely the case that if you are starting your own practice, the income will be slow to come in but the expenses will mount very quickly. Preparing a budget of cash in and cash out for the first 24 months of your practice can be a great tool to understanding what is possible and how to plan for cash shortfalls and avoid unexpected expenses.
The costs to start up a medical practice can get expensive. It is always a great idea to seek advice from successful existing practices as their connections can assist you in many ways, including patient referrals, the consideration of subleasing office space and sharing of office administrative costs, or just learning from the experiences these successful physicians had in opening their practices.
Choosing the location of your medical practice may seem obvious. It is definitely not. You need to consider many issues in choosing your location and the actual office space. An experienced real estate agent who specializes in the medical field is invaluable here for both location choice and negotiation with the landlord. Always remember that you are running a business that has many competitors for your patients.
You say you have done your homework and are ready to start your practice. Do you have a good banker who works with doctors? Did you get an experienced billing service? What about that bookkeeper who will provide you with current checkbook balances and financial statements? Finding that office manager who can oversee all the functions in your office is probably one of the most difficult things to do. Seek the advice of a medical consultant to help you find this person. Your county medical society can also be a great source for help.
If you entered into a recruitment agreement with a hospital that provides a loan guarantee for a period of time, be sure to understand the tax ramifications of that loan guarantee. The money coming in from the agreement is not ordinarily taxed right away. That money, however, is used to pay expenses, which are currently deductible. This leads to having large expenses in the initial year coupled with a smaller income. However, that loan guarantee becomes income later as you fulfill your obligation to the hospital. This mismatching of deductions and income can be a problem. Your CPA can help reduce the tax impact of this mismatching.
Starting your own medical practice can seem daunting. You have already worked so hard to get to where you are now, only to hear that you have just started. Take pride in what you have done and know that running your own practice has great potential for great reward. Now go for it!
Jim Rice, CPA, is a shareholder at Sol Schwartz & Associates PC. He has 39 years of experience in public accounting. In addition to providing business consultation, financial planning and various other accounting services, Rice specializes in income tax planning and consultation. He works with a high concentration of physician practices and high net worth individuals. Contact Rice at 210-384-8000, ext. 112, or at firstname.lastname@example.org.