Austin, Texas Asset Protection Attorney • Physicians Only
Serving Lakeway and the Surrounding Austin, Texas Area
This article was prepared for the TMLT Reporter magazine. Please contact the author.
Asset Protection, The Perfect Corporate Structure — Part 2
- Should the medical practice be a C or S corporation?
Last issue, we addressed the asset protection reasons why you should incorporate your medical practice. When you incorporate your medical practice, you create a contract with the State of Texas to take advantage of favorable state laws. Your new entity will need a separate tax ID and you will have a planning choice to make with the IRS.
This issue, we will address the pros and cons of "C" vs. "S" corporations. If you do nothing, then by default you become a regular corporation known as a "C corporation" from subchapter C of the tax code. As an alternative, you can file Form 2553 with the IRS and elect to have your new entity be taxed as an "S corporation". Note that if you are married, your spouse should also sign Form 2553 agreeing to this election.
There are pros and cons for both C and S corporations. The following is a brief comparison of some of the factors which go into your decision.
Disadvantages of C corporations:
- Separate Tax Entity A C–corp is not a "pass thru" entity meaning that any income left in the corporation at the end of the year is taxed at the corporate tax rate (35% for physicians).
- Potential Double-Tax. If a corporate tax is paid and then the money is later distributed to the physician-owners, the owners also pay ordinary income tax on the monies coming out of the C–corp no matter if the income is dividend income or W-2 income. The author believes that this is a non-issue if the corporation distributes these monies to the physician-owner by year-end in the form of W-2 income which is deductible and avoids the corporate tax.
Advantages of C corporations:
- More tax deductible fringe benefits. Under a C–corp, the physician-owner can deduct 100% of certain fringe benefit contributions
- medical insurance
- medical savings accounts
- disability insurance
- medical expense reimbursement plan
- group term life insurance
- captive insurance companies
- long term care
- traditional retirement plan
- 412i plans
- 125 plans
- Discriminatory Benefit Planning. Only a C–corp allows you to take a 100% tax deduction to fund a discriminatory Equity Disability Trust where 94% of the money is invested in a growth account available for future refund similar to an IRA.
- Free Long Term Care Insurance. Also, you can deduct 100% for long term care insurance on a discriminatory basis with a return of premium option.
Disadvantages of S corporations:
- No tax-deductible fringe benefits. If an S corporation shareholder is a "2-percent or greater (2+%) shareholder", then he or she is treated as a partner. For the purpose of dealing with fringe benefit taxation, the corporation is treated as a partnership. Thus, amounts paid for fringe benefits for a shareholder-employee who is a two percent shareholder are not deductible by the corporation. The shareholder must include the amounts received in gross income, and is permitted deductions only to the extent allowed a partner (i.e. medical expenses in excess of 5 percent of gross income).
Advantages of S corporations:
- Medicare tax savings. A physician-owner has the ability as an S–corp to take upwards of 40% of his / her income as a partner distribution which avoids the 1.45% in Medicare tax and the corporation will avoid its matching 1.45% in Medicare tax for a total savings of 2.9%.
- Pass-through taxation. S corporations are true conduits or pass-through of income, losses, deductions, or credits flowing all of same to the physician-owners in their pro rata share regardless of whether the money is left in the bank account or not. This could be especially important if you have depreciable equipment or real estate owned by the corporation. However, we are advocates of NOT OWNING ASSETS in the corporation since they can be seized by a malpractice judgment.
Editor's opinion: You should periodically compare the Medicare tax savings of an S-corp to the list of deductible fringe benefit tax savings in a C-corp. The IRS will permit you to periodically change from C to S and vice-versa. Please contact my office if you would like information on a feasibility study on this topic. Checkout our website below for copies of my articles from prior issues.
For more information, a feasibility study or presentation, contact Ken H. Vanway at 512-263-2886 or email@example.com.
The information provided in this article is not to be construed as tax or legal advice and should not be relied upon without the specific consultation with a professional.