Sunday, July 31, 2022

Asset Protection and Physician Family Businesses

Physicians doing business with family members as co-owners, investors, or lenders face a variety of legal and financial risks. This checklist outlines some of the most common issues every doctor should address to protect their assets and their relationships.

Our last discussion outlined some of the reasons that physicians routinely end up as defacto family business owners and how a lack of formality in how that business is legally organized, managed, and owned often creates liability and intra-family conflict. This business relationship takes many forms including business loans to family members, hiring a family member to a run a business you own, being a passive investor in their business or co-owning a business or other asset (like real estate) with both capital and operational contributions.


Regardless of the specifics, you have more to lose than just the money you invested up front. Consider the following business planning checklist the bare minimum and then apply your own fact pattern for any industry specific risks.

Document Loans and Secure Your Interest While there are certainly many advisors that take the position that you shouldn’t do business with family members and should never lend family members money, many physicians do so out of both family obligation and in search of a return on their investment. If you are making a business loan to a family member, it’s important to carefully document the loan in a way that, as a minimum:Memorializes the borrower’s acknowledgment of the amount of the loan and the repayment term or obligation
Addresses the minimum applicable interest rates and other terms of the loan required for the loan to be legitimate and legally compliant with IRS tax and gifting rules
Provides a security interest for the loan that can include a collateral interest in the business’ assets, income and receivables as well a personal guarantee from the borrower
Beware of Credit Obligations and Co-signing. In some cases you are lending your existing capital, in others you may be assuming debt obligations directly for capital or to finance the purchase of an asset or going business, either as a owner or partner or simply as a guarantor. Consider the risk carefully and be sure you understand if you are guaranteeing only a portion of the loan or if you can be collectible for the entire amount and if you are financially and legally prepared for and can survive a possible default.
Have a conversation about money, then write it down. It’s important that both parties explicitly understand their roles and the expectations about compensation and profits. If you have a family member running a business that you own as your employee, agree to a rate of pay and make that relationship formal and legally compliant with all tax, wage and labor laws. Conflicts often arise when an operator thinks their salary is a “draw” or that their labor includes an equity position because these issues were never clarified.
Formalize your ownership with paperwork. As an owner or investor you need legal documentation of your interest in the form of LLC membership interest or partnership or s-corp. shares, etc. for tax, legal and estate planning purposes. Without this paperwork the business does not belong to you despite any understanding or agreement you think is in place and will go the estates and creditors of the business’ official owners. This is especially true if your family is unaware of the details. Co-owned entities also need operating agreements that outline the owners’ agreements on operation, governance and profit sharing among other details. Your brother-in-law merely recording the LLC for the motel that you financed isn’t enough.
Have a Separation Plan. Not every relationship is forever and if your family business is a partnership it needs a buy sell agreement just like any other that covers the basics like the ‘Five Ds’; the death, disability, departure, divorce or disqualification.
Have a Continuity Plan. Many family businesses end or suffer when an operating partner or key employee that manages the business for their physician partner dies or is disabled. Consider how and if the business would continue and risk management like key man and disability overhead insurance.


The details of successful family business operation fill books and magazines. This covers only the most basic issues and can’t replace professional guidance about your facts that can help protect both your investment and family harmony.


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Saturday, July 30, 2022

Summer Bootcamp: Top 10 tax planning ideas for physicians in 2022

Editor's note: The information is this story was taken from a recent Medical Economics Bootcamp session. You can find the full video of the session here.


INTRODUCTION


Taxes are inevitable, but that’s no reason they must unduly lighten your bank account. Proper tax planning can keep Uncle Sam from taking an outsized portion of your income. With recent changes to the tax code, some of the strategies of the past have become outdated, whereas new possibilities have become available. With inflation at the highest it has been in four decades, the need for physicians to utilize these strategies has gained outsized importance.


LEARNING OBJECTIVES


  • Understand top tax planning ideas for physicians to reduce their tax burden
  • Gain insights into how to achieve financial independence
  • Learn about effective financial decisions physicians have made in their lives and how it affected their future.



MEET THE PANELIST


David Auer, CPA, MS, PFS, CGMA
President and Founder, Physician Tax Solutions



Planning for your 2022 taxes

The first part of developing an effective tax strategy is finding out which tax bracket you fall into and how much more you can earn before you move up to the next bracket. Most doctors will find themselves paying around 35% and possibly up to 37%, according to David Auer, CPA, MS, PFS, CGMA, president and founder of Physician Tax Solutions. If you have a C-corporation, the tax is a flat 21%, whereas self-employed physicians have a 12.4% and employed physicians have a 6.2% Social Security tax. Physicians should also factor in their capital gains taxes, as well as state income and corporate tax liability.

President Joe Biden has proposed increasing taxes, but legislators are running out of time to make the changes into law before the end of this year. Auer doesn’t believe taxes on the highest earners will rise to the historical high of 94%. “Depending on what state you live in and what other taxes you might be subject to, (your tax rate) could very well be into the 60% to 70% range, and that becomes very important when it comes to tax planning,” he said.

Auer recommends that doctors maximize their retirement plan contributions, which lowers their taxable income and moves them to a lower tax bracket. He also recommends considering a Roth conversion, which involves rolling over transferring funds from a traditional IRA or plan funds to a Roth IRA. This maneuver can be done by individuals who own a traditional IRA, a SEP IRA or those who’ve had a SIMPLE IRA for at least two years. It is also available to those with a 401(k), 403(b) or a government 457(b) plan eligible for distribution.

Roth IRA funds can be withdrawn tax-free so long as the funds have been held for at least five years and the holder is 59.5 years or older. There is also no lifetime required minimum distributions for Roth IRA owners.

Auer also recommends considering funding a “back door” Roth IRA and a Mega Roth 401(k) to further lower your taxable income. If properly utilized, these can enable physicians to put away an additional $66,000 and lower their taxable income.

When it comes to investments, Auer recommends harvesting capital losses, which can offset current and future capital, plus an addition $3,000 a year. However, beware of the capital wash rules that say you can’t buy the same assets, which leads to the initial loss for 30 days.

Physicians should also consider converting W-2 income to 1099 income either in part or entirety. This is helpful, especially if the physician has locum tenens income in addition to their regular job. This also adds the ability to claim business expenses as deductibles.

To those physicians who already have Schedule C/1099 income, Auer recommends considering converting that income to an S-Corporation LLC. This will lower self-employment taxes and reduce the risk of an audit. “Based on the most recent published statistics the IRS has provided, generally speaking, if you have a Schedule C income of over $250,000, you currently have about a 2.5% chance of an IRS audit,” he said. “If you have that same income going through an S-Corporation, statistically, that drops your audit risk down to 0.7% — a fairly significant drop in the risk of an audit, everything else being the same.”

With an S-Corporation in place, Auer recommends considering employing family members by putting them on the payroll and assigning responsibilities. This shifts income from being subject to your tax bracket to being subject to their tax bracket.

A physician can also maximize their home office and automobile deductions. There are acceptable ways to do this, so it’s best to work with a tax planner to ensure you’re getting the most out of your vehicle and workspace. Physicians should also consider the per diem allowances for lodging and meals as opposed to the actual expenses.

Finally, physicians should consider making a pass-through entity (PTE), such as an S-Corporation or partnership, to pay individual state income taxes at the PTE level. You would be able to deduct the cost of that tax dollar for dollar. This is available in 40 states.


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Friday, July 29, 2022

Utilizing NIST Safeguards to reduce liability under the Stored Communications Act

With remote working and devices being interconnected, it is imperative to appreciate the implications of accessing electronic information without consent, even if it’s a spouse. Importantly, passwords and consent should not be given to a spouse, partner, or roommate. If a person works in a sensitive field such as healthcare, law, accounting, or finance for example (not to mention government employees and contractors), then setting boundaries that adhere to a plethora of laws and professional obligations should be implemented. As an aside the application of providing access to electronic communications that are part of work, even personal archived emails, social media, or smart phones that are accessed without consent are subject to violating a variety of laws including the Computer Fraud and Abuse Act (1986), which enables individuals to use this federal criminal law to sue others for civil claims based on unauthorized access, as well as other laws explained below.

A recent example that brings the significance of not securing information to light is the 25 page indictment brought by federal prosecutors against Seth Markin who allegedly stole from his then-girlfriend, an associate at a prominent law firm who was working at home during the pandemic on an acquisition deal related to a major pharmaceutical company’s acquisition of a therapeutic company. Additionally, the U.S. Securities and Exchange Commission also filed insider trading charges against Markin and one other person.

Enacted in 1986, the Stored Communications Act, 18 U.S.C. §§ 2701, et seq. (SCA) has a primary purpose that is analogous to the Health Insurance Portability and Accountability Act of 1996 (HIPAA) Security Rule - to protect the privacy and unauthorized disclosure of stored electronic communications. While HIPAA is specific to protected health information (PHI) and the Security Rule is limited to electronic protected health information (ePHI), the SCA extends to stored electronic communications. As the U.S. Department of Justice explains, “[e]lectronic storage is defined in 18 U.S.C. § 2510(17) as both any temporary, intermediate storage of a wire or electronic communication incidental to the electronic transmission thereof and the storage of such communication by an electronic communication service for purposes of backup protection of such communication.”Like HIPAA, which extends beyond external hackers, so does the SCA. In Ehling v. Monmouth-Ocean Hospital Service Corp., No. 2:11-cv-03305 (WJM) (D.N.J. Aug 20, 2013) the District Court for the State of New Jersey held that non-public Facebook posts, which are configured to be private are indeed covered under the SCA because they are:

  • electronic communications;
  • transmitted via an electronic communication service;
  • in electronic storage; and
  • not accessible to the general public.

Although the court recognized and applied the “authorized user” exception – one of two exceptions in the SCA, caution should be taken regarding if the person providing authorization has the authority or right to do so. Also, if a person’s Facebook or other social media is linked to an email, separate permission is needed for each application. Also, as lawyers appreciate potential clients may reach out through private social media or a colleague may send a link to an article and reference a case that is been worked on. Regardless of whether the person gave the roommate or spouse permission, professional rules and other laws dictate otherwise.

The HIPAA Security Rule has Security Standards (45 CFR § 164.306(b)). As HHS reinforces in a bulletin, “[t]he Security Rule is clear that reasonable and appropriate security measures must be implemented, see 45 CFR 164.306(b), and that the General Requirements of § 164.306(a) must be met.” The task of addressing the changing cybersecurity landscape on both a professional and a personal level may seem daunting and, in some ways, it is. Here are some compliance tips, which can be used in healthcare, a variety of other industries, and personally:NIST is a great resource and utilizing its standards may mitigate liability. I always recommend SP 800-53 (rev. 5 is the current version), as well as a HIPAA specific one. “NIST’s new draft publication, formally titled Implementing the Health Insurance Portability and Accountability Act (HIPAA) Security Rule: A Cybersecurity Resource Guide is designed to help the industry maintain the confidentiality, integrity and availability of electronic protected health information, or ePHI. The term covers a wide range of patient data, including prescriptions, lab results, and records of hospital visits and vaccinations.”
Adopt a Remote Worker checklist for working from home and traveling. Some fundamental items are: (1) secure WiFi at home and when traveling (use a hotspot); (2) ensure that if you are syncing your Apple products (or other devices and software) that your private messages are not connected to another person’s account – whether family, friend, or colleague; (3) educate yourself and understand how your private messages on social media may end up being looked at by a spouse, roommate, or child (hint: if you get alerts know where the alerts are going and who has access to your phone, tablet, or email account); (4) set policies and procedures and have workforce members and contractors review and sign off on them, so they understand the potential legal liability that may come with sharing information; and (5) if you are a small business (or even a one person physician practice or law firm), have your disaster recovery plan as well as incapacity plan in place and pick a trusted person and have the information in a safe deposit box to be accessed only when needed.
Training is critical. Workforce members should also be educated as part of cybersecurity and HIPAA training on social engineering, phishing, and wrongful disclosure of both PHI and personally identifiable information.


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