40: Overcoming Financial Headwinds to Thrive as a Private Practice Owner Today

Hey, dental associates and new practice owners. Welcome to the Associates on Fire podcast powered by Practice cfo. This is the podcast that teaches you what you never learned in dental school, the financial side of dentistry. We cover topics from planning for ownership, buying a practice, to student loans, taxes, and all things financial for the hungry to learn Dental Associate. So let's light it up.

Welcome everybody to another episode of the Associates on Fire podcast. This is Wes Reed coming at you. Excited today for our podcast because I'm interviewing some of my colleagues and friends and key advisors here at Practice cfo. But before I introduce them, let me give you all a quick update on some changes to the Associates on Fire podcast. We have noticed over time that the Associates on Fire podcast content has been really valuable for not only associates, but for really any dentist, dentists throughout their entire stage of their life cycle, of their career. And so we have renamed the podcast to the Dental Boardroom podcast. We, we went through a survey among our clients and got feedback, some internal commentary and thoughts. And this is what we read. And let me just share why we arrived at the Dental Boardroom podcast. We at Practice CFO play the role for our clients as a chief financial officer, or cfo, because we believe that all private practice owners need somebody to provide them strategic financial guidance as the CEO of their business. And so that is the role that we play at Practice cfo. Not only do we do the accounting and the tax and oversee payroll, but we're very much using that data in order to give strategic financial advice and to guide our dentist in some of the most important financial decisions that they make. And so we have thought of the concept of a boardroom. And a boardroom is where sort of the chief executives, the chief, what they call the C suite, the kind of head leaders, the officers of a corporation, get together and they discuss some of the most important decisions for that business. And that's sort of what we're doing in these podcasts as we get together with industry leaders, with dentists, and us as the financial advisor and consultant and CPA to talk about some of these big industry changing events taking place and how they apply to dentists. So there you have it, the Dental Boardroom. Stay tuned for the new branding coming out. We're excited about that and that's how we'll be referring to it going forward. Now we still have the Associates on Fire website, www.associatesonfire.com, where you can go and sign up. We encourage you to sign up. If you do, you'll get added to our newsletter where we Release a lot of great content related to our podcast. It's free. We have a lot of videos, free videos on there for associates who are making financial decisions as an early stage dentist, as well as associates who are in the process of buying a practice, and then for standard private practice owners of a dental practice. So much great content there, and we hope these podcasts are helpful to all of you as well. All right, let's get rolling. Today I have Paul Lipschiss, cpa, and Nick Dougherty, cpa, both been here at the firm for a bit. Paul is one of our senior advisors, and Nick is one of his team members that supports Paul, and they lead a team here within Practice CFO that is called Team Zen. And we'll have them explain why they chose the name Team Zen as they work on financially guiding their clients. They work with a lot of dentists throughout the country, and. And they do this every single day. And so what I'm doing here is I'm starting off a series of podcasts with our CFO teams internally. We have four of them, and so we're gonna do four podcasts. And the goal with these podcasts is to talk about what we, as a team of financial advisors specific to dentists, are seeing in the industry with the changes around dental insurance reimbursements, issues around Delta Premier, the emergence of the DSO and what's called the DPO space, talking about student loans, talking about changes in tax laws, and I think the most important thing is talking about how dentists can structure a financial system in their life in order to produce the best results financially, month to month, year to year, and throughout their career, and ultimately become financially independent a lot earlier. So that is the name of the game, and that's the purpose of existing here at Practice cfo. So, Paul and Nick, welcome to the program.

Glad to be here.

They're nodding their heads. All right, guys. Yep. Thank you. They're literally down the hall from me, and we are doing this virtually because the technology is just great that way. Well, let's jump into this. I got a set of questions that's going to guide us. And my first question is this. And I'm going to direct this to you, Paul. So there is a lot of pressure today on dentists. As you know, a lot of dentists come out of dental school with some trepidation on what the future looks like for them. They come out with a lot of dental debt, student debt when they buy practice, they add on more debt. When they buy equipment, build out, et cetera, more debt. They buy a house. More debt. Even well established dentists still have a lot of debt on their balance sheets these days. And they're paying loan payments on that debt, which is soaking up a lot of their cash flow. And there is just the competition in dental. There's large group practices which are growing at a relatively quick pace. So my question for you is, is there still space for the private practice owner to thrive, as we use that term, internal, internally, to thrive financially, and what are you doing to help them stay positive and to be able to do that?

There's definitely still a space for the private practice space, 100%. And you mentioned a few pressures. I'll add some more. Insurance reimbursement rates are shrinking, hourly wages for staff are rising.

And certainly there's a subset of the market getting squeezed.

What are we doing to combat that and protect the private practice space? I don't know that the advice has changed in the past five, 10 years, but it's become critically more important that, number one, private practice owners have to believe they're the CEO, they're a leader, they are a business owner, they have to have tough discussions with staff, they have to make tough decisions around which patients they're treating in their office and so forth. And they have to really own that role. Number two, they have to consolidate and simplify where necessary. There's certain things as a business owner you can't get bogged down with and you have to be efficient and focus on the strategic side of your business, holding people accountable, leading a team. And then, number three, they have to continually reinvent themselves.

Right.

The space is changing as much as it's staying the same. But there's new challenges in terms of regulations, in terms of. You mentioned Delta Premier is.

An issue with, you know, incoming doctors not getting the same status and so forth. And then as fast as you can adapt to those. We have hygienists now making 60 plus an hour. And so how do we deal with that when a profi under a PPO plan is only paying 70? We have to reinvent ourselves consistently. So that's my long answer. Short answer is there's absolutely still space for the private practice. I don't buy into this being the second coming of medical consolidation. I think there's a variety of reasons why they're different, particularly not being as insurance driven. As a medical space, we see a lot of managed health care, whereas we don't see that as much in dentistry. And I think the profile of the practice that will thrive as an independent operator might Change, they might have to adapt, but it, but I don't believe it's the second coming of medical consolidation. And I think our clients that embrace those three factors will still be standing and still be very strong when it's all said and done.

Let me ask you on a, One of the things we do is help our clients do those three things and really try to coordinate an ecosystem of financial decisions in order to become financially independent. And having a strong income is vital, of course, to becoming financially independent. Now there's a lot of factors that go into financial independence. For example, how much one spends where they live, things like that. But what are you seeing? Your dentists who are doing those three things and.

Are building a strong financial foundation in and out of their practice, what levels of income are you seeing them? Just a, just a general range, pre tax income on their 1040 tax returns.

So there's an irony here that.

A lot of folks, like, if I have a client who's got 5, 600,000 in student debt, general dentist, they might want to target a $300,000 practice that they can build up because they're thinking, okay, well I have this debt, let me, let me avoid debt on the practice purchase. And it's logical, but it's the wrong move because when you buy a practice, you're buying cash flows more than any, any other ingredient. And in that, obviously there's equipment, there's patients or staff, but, but, but it all boils down to the cash flows. So what I, what I do see.

Most often is folks who aren't afraid to.

Take that risk, that perceived risk, with the confidence that they can handle it, that it's the right profile practice for them, that they're going to own that. So what I see more than anything is the folks who are getting financially independent and particularly for this new wave of, you know, record setting student debt loads, they're buying a more expensive practice on the front end and they're being disciplined and calculated in how they're reinvesting into that office. Right. So an office is not going to improve. If I hear a lot of that, if I had a CAD cam, if I had a cone beam, an office is going to improve on the legs of how you're treating your staff, your patients. And those things can certainly enhance that effect. But we run a model, we figure out, okay, how many crowns can we replace with CAD cam a month? That's a saver. All right, what cases are we not identifying because we don't have a CT scan and what's our what's our ROI there? That's an example of a decision my clients would make. Not. My practice would be so much better if I had that. It's. No, my practice is great. Let me run an analysis to determine if reinvesting is the right cause here. Now, you know we have all of our clients on a budget. I know that's everyone's least favorite word in the dictionary, but it's necessary. We have to know what's coming out each month. And we have to structure everything from the ground up from that point. So you see both ends of it. They're not afraid of leverage. Debt and leverage are the same, but they're different in a, in a concept, in a, in a framework. They're not necessarily afraid of that and it's an unfortunate reality of the industry, but they're also willing and disciplined to live on a structured set of financial ground rules within that as well.

And so if they live on that structured set of ground rules, somebody coming out of dental school, what do we see in them? Starting off as an associate, maybe at one of the big DSOs or private practice, maybe somewhere around 110 to 140 for a GP. That sound about right?

Yeah, at first. Not even close to what they can do as a practice owner. Not even.

So eventually.

And that's.

Yeah, so eventually they, yeah, they become a practice owner. Tell me when they hit stride as a private practice owner about what an average dentist might be able to earn pre tax.

Well, let's say you buy a million dollar practice, you know, that's gonna, we, we've all probably heard at this point about 40 cents of every dollar goes to the bottom line in operating income. Does 400,000 in income. You got a good CPA. They're reducing that with depreciation and all sorts of other deductions. So, you know, you might see an AGI of 300,000.

But their real cash flow income would certainly be higher that, higher than that 350. What I also find is your first six months of ownership. If this is geared towards some of the new owners, you're not going to. Your primary role is to just not break anything. For, for a blunt way to put it, it's not really until that year point where you can really see, okay, I can add 15% to my top line. And there's a gift and a curse of practice ownership where the first you, you know, you have your break evens and everyone else gets paid before you. And if you don't hit that goal, it can really shrink your Margins, you can go from 40% to 25% margins very fast. But the flip side of it and the beauty of it is if you increase Your top line 10% with incremental changes, more efficient billing processes, just a more efficient delivery, if you can increase that 10%, you might increase your profitability 30%. There's a compounding effect there. So you know, million dollar practice, I think you could see a client doing 300,000 in AGI and maybe 350 in real income. AGI is adjusted gross income, by the way. But year two, three and beyond, you know, that same client can be pushing half a million if they're consistent, deliberate, making incremental changes over that time.

And I would say on average our clients top line collections are probably around 1.5 for a single doctor practice, maybe 1.4 to 1.6. And so if they're able to maintain that 40% profit margin pre, pre debt, pre tax, then you're looking at 600,000. You probably are paying out, you know, $100,000 in debt payments and then that leaves you with about, you know, maybe 500,000 or so there. Pre tax you pay, I don't know, 100, depending where you live. Let's say you're California, you're probably paying 180,000 to 200,000 in FICA, federal and state taxes.

You said 180, but you meant, you meant 18.

But yeah, I got you in FICA.

Yeah, yeah. Well if you add it all together, FICA taxes, which a lot of people don't know the difference between FICA taxes and other income taxes. But FICA is just your Social Security tax. And if you're a practice owner, that ends up being.

What is that, 12.8%, half of that employee, half that employer taxes. And then you've got Medicare tax, which is 1.45 employee employer and you are the employee and the employer as an employee of your own corporation, which we won't get into that in this podcast, but most of you are s corporations and you're an employee of your own corporation. That's really important to understand. And so once you add on the FICA taxes and then you add on the income tax and the income is state and federal tax in California at least, or a higher tax state, you're probably looking, if your pre tax income is say 500,000 or so after depreciation, you're probably looking at a couple hundred thousand maybe in taxes. That seem about right, Paul?

Yeah, it does. And that brings me back to, and I miss this layup, you know, what are you seeing these folks do to combat that? A lot of it's through those retirement plans because they're quite literally a silver bullet for tax planning. Because when you have a client who maybe they're paying four or five grand to student loans a month where they're not getting a tax deduction and then a practice debt where they're not getting a tax deduction on the principal payments and depreciation starts tapering off after year three.

The IRS become, and in our case in California and you know, other states as well, the, the, the tax man becomes the biggest friction. And so almost across the board, you know, our clients are contributing to a 401k plan with a match. A lot of them are doing profit share elements as well as defined benefit elements because if we can structure those, we can minimize staff costs where, where necessary, it's a free benefit. The IRS is basically paying these folks to, to, to, to pay for their staff's retirement. And they're coming out ahead on it. So we see that a lot where they're able to do that. It seems counterintuitive. Folks want to get out of debt so quick, and I get it and I feel for them and I want that too. But there's certain planning checkboxes like a 401k that we just have to check because the tax code was not structured for dental school. It just simply wasn't. And it's a reality that we have to deal with with almost every client.

Yeah, I think once you make about 130,000 married and about 70,000 individual, you phase out of student loan interest deductions. So it gives you no benefit. And it is hard for some dentists to not when they have extra cash flow, to not pay off their student loan debt or their practice debt, or in some cases I've even seen their home debt to, because they want to feel that pressure release of getting out of debt. It's this psychological push sometimes and yet it's very costly to go pay off, say a 4 or 5% tax deductible loan. Your home loan is tax deductible on your personal income tax return. The interest is your, your practice loan is tax deductible as interest to the expense of the corporation. The student loans are not taxable, but usually you're on an IDR plan, an income driven repayment plan like IBR or PAY or rep. And so the government oftentimes depending on your plan will subsidize some of that interest as well. So wherever the government will subsidize or pay for some of your loan payments through tax deductions or in the case of student loans, actually subsidizing that payment. You need to take advantage of that and then reserve the remainder of your cash flows to go fund your future self through these retirement plans and have the IRS pay for, in some cases half of that, depending on the state that you live in. Or if you live in Florida or Texas or Alaska, some state that doesn't have income tax, you're still saving potentially up to 37% on that contribution into that retirement plan because of the tax deduction you're getting at your marginal tax rate. And I've got a video on this on our Associates on Fire website called the timeline of events in the life of an associate where we talk about when do you, when do you buy a practice, when do you buy a house, when do you refinance out of your student loans, when do you start a 401k? When do you fund your IRA accounts? There is a, an effective sequence to those decisions that optimizes the output financially to you. It's a, it's a good video. And also, Paul, you mentioned earlier this concept of sort of breakevens and, and how you have this, this amplified effect of when you're top line, that's your collections. When your top line goes up by 10%, your bottom line, which is after your overhead, your profit might go up by 30%. And that is because of the nature of fixed costs in a dental practice. Dental practices are 70, 80% fixed costs. Whether you have a dollar in collections or whether you have a million dollars of collections in a given month, you have this set of outflows that is exactly the same. And once you pierce that level, everything above that is going 80% to your bottom line. After you pay your supplies and labs and maybe a few other basic variable costs. That's a really important economic concept when it comes to understanding the nature of a, of a, of a dental practice. I have a video on that one too, which I think maybe. Paul, you did that video in our Associates on Fire podcast in Fuel cell number three, so go check that out as well.

Sounds like something I would talk about.

A lot of great content there. Guys. Let's go on to this question. All right, this is an important one. I recently did a webinar with dental economics called why your accountant is your worst enemy, which might sound strange coming from an accountant. I am a certified public accountant, cpa, and yet I see so often, we see so often as new prospects come to us that their accountant was a significant disservice to them over the preceding years leading up to that point. Now, I don't mean to criticize my colleagues out there. There's a lot of CPAs who do a great job, but it is very common, especially when you're letting bookkeepers sort of run your, your financial decisions. A lot of major issues that I see come up. So let me ask you guys that question. What should a cp, what should a dentist, maybe you're a new dentist, you just bought a practice, or maybe you're not getting much out of your account. What should they appropriately expect out of a standard accountant and what should they not expect out of a standard accountant?

So there's two answers. There's a practical answer and then there's an ideal answer. I'll start with the practical answer and it helps for folks understand what an accountant is and what accounting is versus finance. I think that's always a helpful place to start because you're right, a lot of, a lot of folks just feel like they're not getting what they wanted. That's a very common, almost overarching set of feedback we get about the industry when, when we have new clients come in. And the accountant is the historian. Right. And their job's very important. The accountant takes a set of data and summarizes it in a fashion for the leaders of any business, whether or a bank or whomever has a financial interest in the company.

It presents in a format where they can digest and interpret that data. But it's looking in the past, it's a history. And we use this analogy a lot here. It's like an X ray. And so that's typically what leaves people wanting more is what they expect is maybe not inside of the scope of a typical cpa. And what they really need is some guidance and forward looking information. And that's really where we cross realm into finance. So accounting is the past and finance is forward looking now. In finance, some of the best data we have to predict where we're going is the historical results. In fact, almost any model is based off of prior financials. But how do we see our cash flows progressing over the next 612 months? You're just not going to get that from a typical CPA because that's really just not in the job description. And then the folks that do that level of analysis are typically a more sophisticated, you know, private equity or corporate space. And so there really isn't that, you know, aside from our firm and a few Others who sort of bridge that gap. A lot of folks are more frustrated, I believe not with the service providers, but the service itself, if that makes sense. So I think, I think ideally, and hopefully this is the case as a profession, the CPA world does adapt and sort of bridge that gap, which I think is been a disservice to not just dentistry, a lot of businesses, but for the time being it's very niche and not a lot of CPAs are really looking forward helping clients plan around their cash flows, thinking about the next few years.

Along with what happened over the last one year, one quarter, one month.

Yep, here are the.

I love that explanation of it that accountants by training are historians. They look backward and they assemble that data of historical numbers and then they give it to somebody and for the most part say goodbye. At that point they might give a little bit of like commentary about overspending in a category or maybe a comment about depreciation and taking accelerated depreciation. That's very common that CPAs will do that kind of basic, basic language. But here are the four things I had in my dental economics.

Delaware Labs solution. It's a part of their website where they, where they bring people on in areas and they sort of interview them about what they do and, and what they're seeing in the industry. And the four reasons why I wrote that accountants were people's worst enemy or dentist's worst enemy is that number one, accounts have a very complex, complex ecosystem financially with student loans and overhead and debt and corporate taxes and personal taxes and they might own their building and they have to calculate breakevens and they have, you know, sometimes complex leases. They have all of these, these issues and items vying for their dollar in their bank account. And a lot of times accountants just aren't versed in those different categories and especially in a way to integrate advice around them. So they, so they all are fluid with each other. The second thing is they most, most clients, not all, but most prospects that come to us don't have a dental specific cpa. And so that advisor just doesn't understand the industry, doesn't understand comp. Str structures, doesn't understand lending, doesn't understand reimbursement rates and insurance. They're just missing so much context to be. Can I touch on interpreters of the numbers?

I should have, I should have commented on that one. Which is. Is. And of course I do this every day so it's easy for me to forget. But yeah, I mean not everyone has the same issues. But to the extent you can Are.

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You know, pick things that work from some clients and apply them to others without having to spend that time researching. Just allows you to be a lot more efficient in your delivery. So being this niche in this niche allows allows the advisor to be a lot broader in the in the scope of advice because they're so narrow in the set of solutions.

I don't want you to think that that Means we're not customizing to our clients. But there is so much overlap between our clients and their peers that you could think of it like a shortcut. You know, let's be efficient here. We already know the answer to that one, right?

Yep.

I think it's super important.

And I'm a, I'm a big believer that in today's complex financial world, specialty and niche knowledge is more valuable than geography. Meaning that it would be better for a dentist to have a advisor who understands dentistry, who may be on the other side of the country than an advisor or CPA who's down the street that you can go golf with, who doesn't really understand all the nuances of dental niche knowledge is extremely important to running a business successfully these days. The other, the next tool I have, I've even found these with dental accountants, to be frank, as well. Number one is that accountants often don't forecast out what the financial projections are in a practice. And you guys know we do this every day. Every single client meeting we have, we do the cash flow forecast. What are the next six months look like? What does the next year look like with all of our overhead, debt, taxes, payroll, etc. And do we have enough? If we have more than enough, what do we do with the surplus? How do we allocate that to building our personal balance sheet, to building our wealth? And I remember we got a new client one time and they were with the dental CPA a long time. Dental CPA like 30 year long time. And they said when they were going to that meeting, the dental cpa, CPA would say, okay, what do you want to talk about today? And the dentist was like, he told me, wes, I don't know, I was expecting them to tell me what we need to talk about.

So again, I don't mean to throw shade on any, any of our colleagues out there. There's so many who do a great job. But I have even found that among the dental specialist accounts, a lot of.

Times imagine a dentist asking their patient that.

So.

So what.

What should we talk about your mouth today?

What's the clinical treatment plan here for you? Exactly. So, yeah, I mean, for us we've been very deliberate, as you know, in having a full agenda when they come in, that we cover the waterfront and everything. But that was number three. The number four was. Even dental accountants don't often understand the, the intricacies of an ERISA retirement plan, like a 401k and a profit share plan or a defined benefit, a cash balance plan. And you had said earlier, those are silver bullet. And just elaborating on that, the reason why they're a silver bullet is because they're so effective for a small business where you have one primary owner or if, or two, if it's a partnership who make a lot more income than the rest of the employees of that entity. And so a dentist who has say 10 staff, let's say seven of them, are eligible to participate in that 401k plan. You have to contribute a little bit to those seven staff in order to maximize your contribution, which could be all the way up to 60, $70,000. If you're married, it could be more than that for a 401k profit share plan later on a defined benefit plan. If you're really cranking it with your cash flow and maybe you're a little bit older than your staff on average, or you just have very few staff, maybe you're a specialist with only a very few staff. You can fund literally hundreds of thousands into these plans and you can cut your taxes down by 60, 70% in many cases. And you get this incredible circular reference where the more you fund into it, the less you pay in taxes, which allows you to fund more into it next year, which allows you to save in taxes. And it compounds this incredible growth into your personal net worth over time. It's a, it's a beautiful formula that we see in action with so many of our clients. As long as they're living in a way that their personal spending outside of the corporation, their personal spending is low enough to allow them to have excess cash flow in the practice to fund these retirement plans, then it becomes a beautiful thing. But if you make a million dollars a year pre tax and you're spending $1 million a year pre tax, you're not going to be able to fund these things and you're going to have to pay massive amount in taxes because every dollar that comes out for you to spend, you're having to pay taxes on that dollar, which is a, which is a death spiral from a, from a wealth building approach.

The other thing I'll add on those plans is I said silver bullet, which probably is inaccurate because they can be silver bullets if they're designed correctly and they're planned properly. A lot of times when I see folks come in with a cash balance plan, DB plan, they get a letter in like March saying hey, you can do 200,000 and what the heck, I didn't have the cash. And you know, what's the staff cost? Nobody's really Looking at that. And so you really have to make sure you have to be thinking and especially with a defined benefit, I'm not going to go too deep into it, but you have to be thinking in three year increments. You have to commit to these plans. And there's tax, there's staff, there's cash flows. You have to think about those three components and it's not worth it if one of those doesn't pencil. But in many cases there's nuances to the plan design. So I agree with you. I unfortunately didn't listen to that one yet. But I like that number four point. That's an area where folks are so often underserved and they just have two different, maybe three different advisors that maybe are all doing a good job. But there's just this lack of cohesion around it, marrying all those components up.

And I think that right there is the most essential value coming out of a sort of the CFO concept for a practice. The CFO model is the bringing it all together into a master plan. This cohesion or this integration. Okay, in the remaining few minutes I want to ask a few more quick questions. Maybe we'll touch on these a little bit quicker. A lot of times people think. I want to touch on the topic, on the topic of tax planning. A lot of times people think that.

Tax planning is going and getting some secret credit, some secret deduction buried deep in the tax code and that a good tax planner knows the tax code so deep that they can uncover those little secrets, those nuggets that other CPAs don't know about. And they'll come and they'll talk to you about the research and development tax credit, they'll talk to you about captive insurance, they'll talk to you about certain trusts. They'll talk about these things that just sound sexy and complicated. And you're thinking that's it, that's tax planning. That's something that nobody else knows that you know, that I'm going to know and I'm going to save all this money in taxes. And oftentimes all that does is complicate their life and not end up seeing a lot of taxes and could get them into audit trouble with the irs. So explain to, to, to me or explain to our listeners. Paul and Nick. Feel free to chime in if you'd like. What is effective tax planning?

Not that, no, no. In all seriousness, at what cost? Right. So you know, you mentioned some tax strategies that are often touted, touted in the, in the dental space, R and D Tax credits and so forth. At what cost? You're paying a firm 30, 40%. They're not going to be on the hook for an audit.

When that happens. I'm not saying I'm categorically against them, but. But at what cost? And one thing Nick and I talk about all the time is we're not current year Hero CPAs.

Current year Hero CPAS does whatever they can between December and April 15th to minimize that tax bill. It doesn't matter what next year or the following year looks like. There was a lack of planning. They're trying to lower it so they don't get.

A mad client. What we try to do is build it between January and December and sometimes, and it's actually quite often where we say, hey, I don't want to fast forward this deep depreciation deduction. You're in a really good situation. You're phased into your child tax credits, you're phased into this, that and the other thing next year with how you we expect you to perform, we can really use those deductions. So doc, I'm going to have you pay a little more this year, but we're going to get a spread next year. So I think tax planning.

The other unfortunate truth is tax planning is just so much as much about wealth building as anything else. You're talking about the doctor who spends a million, makes a million. What about the doctor who has a million investments that's growing at a 7% annual clip. You're not realizing those gains. And when you are, they're at capital gains, which is a lower tax rate. So a lot of times good tax planning is what you did over the past 10 years, not what you're doing in the current year.

It's a different discussion around building wealth. Billionaires don't pay tax because they don't sell. They let their assets grow, they leverage those assets. And it's an unfortunate truth about our tax code that.

You know, capital gains, your investment income gets taxed at a far less rate and you can manage when you decide to realize those taxes. So I think good tax planning is more philosophical in nature than a silver bullet. What are my friends doing? That being said, we have plenty of low hanging fruit. Nick, what are we doing, you know, kids on payroll. Name some other ones that we do with, with so many clients, home office deductions. And, and don't get me wrong, we want to find those nickels and dimes in the, in the couch cushions. Absolutely. But, but the, but the, the framework is around building wealth and the Aggregation of decades of, of decisions, not just this one opportunity.

Yeah. And we, we will look at those 1 opportunities like the earned income credit is something we looked for all of our clients and we've helped a lot of them apply for those very legitimately. We helped a lot apply during the COVID for a number of the COVID incentives that were very applicable for our doctors. And a lot of times we get a new prospect, we go through the prior year or year's tax returns and have amended some of those returns and got hefty checks back in some cases. But the tax planning that I find is effective during the year, as you said, January to December, not waiting until the year's over and trying to do it right before filing the return, which is when most accounts tend to do it. But it's when you look at the full cash flows from your collections to all of your overhead to your debt, to all your initiatives. Are you doing a build out this year? What equipment are you thinking about buying this year? What's going on in your personal life? Are there any electric vehicles, talking about solar? You're looking at everything and then you're seeing it all in the aggregate and you're looking at where is the client's taxable income on the tax scale, on the brackets. And this is one of the most important concepts to tax planning is what is your marginal tax rate? Because you plan at the margins. And so if you don't know this listener, you're not just taxed an effective rate like 30% on all of your money. It's as you earn more money, that new tier, that new block that you get into, is taxed at a higher rate. It's like steps, and every step has a higher rate. So we want to know what step are you on? And that determines how much tax you're going to pay. And if you're in the higher steps, we're going to try to push as many deductions into this year. But if you're lower steps this year because you just bought a practice and you have a bunch of depreciation, for example, or you're just starting up or whatever it is, you're in a lower tax bracket, we may push some of the deductions out to the next year when you're going to be on a higher step and you're going to get an additional 10 to 15% tax savings on those, on those dollars of expenses or investments. So at the margins, tax plan at the margins. And there are things you cannot do after December 31st at least not easily like changing your payroll, funding your elective deferrals in your 401k, buying certain equipment, getting solar installed on your, on your roof. So that stuff has to be done by December 31st. And accountants aren't available from January 1st to April 15th because that's their busiest time of just trying to file the return. So they're not going to be very involved in tax planning and they're taking vacations a lot of the rest of the year. So they're not going to be there helping you plan. So everything we've done at practice CFO is really based upon that. More ahead of schedule at the margins. Cash flow based tax planning.

Yeah, I think that's how we're structured by design. Right. Where you know, inherently as an advisor and a planner, I want clients to pay very little in taxes. That is direct friction for them building their balance sheets. Right. And we rely on our tax experts to know the nuances. Right. That, that's super important. Like a specialty office. You know, there's parts of the tax code. I'm not going in like a three molar root canal that I'm sure a lot of our general dentist listeners wouldn't do. You got to call the endo. And, and I think that's really important and unique about what we do is that we have that specialty in house. You know, Nick and I will, we'll, we'll talk about all sorts of creative planning like you mentioned before December, because the ship has sailed after the fact and we'll see what's available and then we'll have that risk assessment with our tax team kind of figure out is the risk reward there. And I just don't think with these firms offering these high priced solutions that the incentives are really there. They're just trying to get the maximum dollar in that year for the maximum payment, typically a percentage of whatever the recovery is. And they're not really thinking holistically about that client's situation at all. So I think structurally we really acknowledge that tax planning is more comprehensive than, you know, this little nook in this other cranny of the tax code.

Yeah, I've seen. Oh, go ahead, Nick.

Yeah, I was just going to say.

Exactly.

Paul, I think even if you think about just your practice ownership phase of your career versus your retirement phase and managing the taxes throughout that process as well, it just starts with the goals and where your goals are for financial independence and then reducing that friction while you're a practice owner and while in retirement and making sure that you've got a, you know, gauge on what the tax code is at that time and adapting your plan to reduce that friction.

Yeah. And important comment about tax planning. There's tax planning of your income before it goes through the tax screen of ordinary income that you've earned from working. And then there's tax planning of once you've converted that into assets personally, like real estate or stocks and bonds, how do you tax plan so that those new assets, the income generated from them is, isn't taxed too heavily? And those are things we have to look at. We always do. But that's important that people understand that there is a screen you go through and you have to tax plan on both sides of that screen.

Okay. Yeah. And I'll just say, you know, I've had clients come in and we see their CPA took accelerated depreciation in a year where they were literally in the zero tax bracket. Or I've seen annuities put into IRAs sometimes. Yes, there's a number of these issues where sometimes maybe there's, there's a reason behind it, but, but oftentimes there's. There's just no reason other than it was a blind decision. Because on surface it seemed like the right tax planning decision, but when you look at things collectively, it's not. And that's good tax planning. It's looking at things collectively and especially trying to structure the cash flow so that you can properly fund a retirement plan like a 401 KDB. All right, the last, the last question before I ask you, why the name Team Swell? One more, one more question. I'm sorry, Team Zen. Team Zen. We have another Team. Team Swell. Sorry, guys. I told him I wouldn't make that mistake. But we have four great teams. This is Team Zen. But before I ask that question, one thing that you are well known for, Paul, here at the firm and among your clients is being a great investment advisor. And you are licensed to be an investment advisor. You manage a lot of 401ks, a lot of assets. For clients who have sent that money from their business checking account into a personal.

Savings account, whether that's a 401k DB plan, brokerage account, IRA, 529 account, whatever that is, you've done that very successfully. Right now, the market, 2022 November, a lot of interest rate hikes by the Fed market is suffering from this. Tell me, how are you advising your clients right now who have a significant amount of assets or at least a meaningfully amount of assets invested in the market?

Trick question. Because.

Times like these, the water peels back and we figure out who's swimming naked. Right? And, and what really needed to have happened is our decisions about today were based on discussions that were had a year or two years ago. If, if, if you're getting heartburn in this market, it's because your risk tolerance isn't aligned with your goals. Because this is not a surprise. This is how markets react. And it really shouldn't surprise anyone, particularly with how the last two years have gone and the easy money party and kind of what's ensued. And not to say we're some sage guru firm who predicted that, but I don't think anyone around here was surprised. And large in part. I think my clients feel really confident because.

You know, I actually said this yesterday to a client and they're probably listening and they'll, they'll vouch for this. But I said, look, I, I can make long term decisions about your asset allocation and funding, but I have to be cognizant of them not interfering with your short term liquidity needs and your short term planning decisions. Like there's 100 plus years of history that stocks provide outsized returns in the long term if you can withstand the volatility they do versus bonds and other sorts of investment classes. But we know they're volatile. So if, if I have a client who is buying a house or funding college education for the kiddos or you know, they might just need a nest egg for things they're doing in their practice and I have that all in stocks. Well, that, that's a problem because this is part of the cost of getting those returns is there's, is their sell offs. So there's plenty in the short run to be pessimistic about.

There's a laundry list of them. You mentioned interest rates as being the primary one and this is maybe the most normal. We've seen an economic backdrop of financial backdrop in the past, gosh, four years, it seems, where rates were artificially depressed and the free money party ensued. And so I think my clients are well positioned. I think they would all, for the most part agree that it's not a surprise we've aligned their objectives with this known truth of volatility in the markets in large. In part they're staying the course. I think most of them are looking at this as an opportunity as well.

We don't know when peaks and troughs ensue. There's no, no one knows. But we know if we were investing in Q4 of 2021, we love stocks. Today, because the forward returns are better today than they were in Q4 20, 21. And I think in large, in part, many of my clients have been increasing contributions to be able to take advantage.

So I think obviously there's short term problems that the economy is facing and that's materializing in both stocks and the bond market. But I think long term, if the objectives have been aligned, there's absolutely no need to panic. And this could be potentially one of those big opportunities where wealth is created if we can be disciplined, if we can tighten our belts, continue to cash flow our practice, and really buy the dip for that term. That's thrown around a bit too much. But there is some truth to it. Buying the dip.

You know, when I think of this, a moment like this, I think of two things. Number one is have we done a good job at helping our clients build their wealth ladder? And the wealth ladder being, do you have at the first rung, do you have a personal emergency reserve account?

Yes.

Right.

Do you, do you then have a business, not necessarily a business savings account, but do you have a business reserve balance? Working capital? Yep, the working capital, we call it the working capital base, which is usually around a month of total outflows. So that might be, you know, $100,000 for a doctor. Different doctors have different psychological tolerances for how much they need in the account in order to sleep at night. But do you have enough that you could weather three, four months of 50% collections of relatively low collections. So that's rung number two. Rung number three, have you eliminated your credit card debt?

And you could almost make that rung number one if you wanted to, to be honest. But. And then, and then after that, are you funding your IRA, funding your 401ks, funding other accounts go and building other assets in your balance sheet. So that's number one. And if you've got those first two, three rungs on your ladder established, going through a market like this, you should be sleeping like a baby at night. Number two, my second thought on that is this is the opportunity to do what sometimes we hear thrown around called dollar cost averaging. And it's been amazing to see virtually all of our clients. I can't think of a single client who has scaled back their contributions out of fear of the market decline right now. Instead they are thinking, hey, share prices are lower. I just dollar cost average, which means every month I put in the same amount consistently. I don't even look at what's happening. And then over time.

As it goes down, my average cost Per share ends up being very strong. As the market comes up, I get all of those gains. There's a specific definition for that, dollar cost averaging. That's my second thought on that. So great commentary. And we also have a podcast coming up soon with Brandon Hobson, our chief investment officer here at the firm and a partner of the firm, where he talks about the stock markets, what we're doing as a firm, how we're adjusting our models, our allocation models, for subtle changes to address where we are in the market cycles and interest rates, et cetera. So stay tuned for that. One last question. Team Zen. We have teams here. You two are on Team Zen. Why did you choose the name Team Zen? And how does that relate to people's personal finances?

Team Zen? Well, the idea behind it is.

And it's kind of tangent related to some of the things we talk about in terms of tax planning, but sophistication and complexity are two different things. And I believe that when it comes to the client, the service offering is very sophisticated, but largely simplified. It doesn't have to be extremely complex. So what I mean by that is, for example, in tax planning, I don't want my client to know every tiny detail. I want Nick and I to be able to give them the two or three things I need to think they need to execute on to make this happen. If they want to know the rest, by all means, if that's where they find their Zen in the details, we'll do that. But large in part, I want to make it simple. Follow these instructions, hit this number per month, look at this number on your P and L, because that's an issue. The outcome is a sense of ease, sense of a breath of fresh air, so to speak, that you can just kind of operate. You can operate and not be worried about 500 things. I want you to worry about these three or four things. These are your focus areas. Let me focus on the rest. But if we can simplify it with a very sophisticated organization behind the scenes, I don't want to say that this thing is, is easy. It's not. But the Zen comes from the simplicity of tying that all together for the client with a goal, with a framework, with clear objectives.

And then, yeah, the idea is peace of mind. Zen.

I have seen a lot of dentists who create a life of intense complexity. And no offense to you docs trying to build 10 offices, but I generally see you docs not achieving Team Zen. Maybe that's your long term goal. And I don't want to necessarily discourage you from what you're doing heart really believes in. But a practice doing 1.5, 1.6 single doctor with a 40:40 profit margin and a really good pattern of financial flow, a really good financial system, an M.O. so to say, creates this framework where everything seems to just be moving, the wheels are greased, everyone knows their, their positioning, they're doing their things consistently and that creates simplicity and I think it does create that sense of just having it together and peace. And how do you put a price tag on that? So if you have that and you're setting aside a good deal of money for your future self, that is ultimately the greatest combination and that can be achieved in dental ownership. And we have doctors, you know, I have some doctors doing a million dollars a year in a private practice who have a great work life balance. It can be achieved and it's a, it's a beautiful thing. That's really why we exist here at Practice cfo. Thanks guys for the podcast. Thank you for the content. If you are interested in learning more about Team Zen, Paul and Nick and their team, go to our website@practancycfo.com and at the top you can click on our services and choose my team and you'll see Team Zen on there and you can have see some more videos of, of Paul explaining his approach to working with clients and a few things about that team. And then you can even schedule directly with Paul to explore working with him. Guys, thanks for joining.

Thank.