Resource Centers:(News, information, and tools to support your practice)
September 2010
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Time is money
By Marion Demaria, CPA
Let’s face it. Finances can be a dull topic to some. But, as most people are aware, it’s incredibly important that your financial matters be well organized and tracked.
And with a couple of useful pointers, you can minimize the time requirements necessary and have more time to do the things you enjoy.
Separation is crucial
It’s important to the health of your practice that you keep your business and personal records separate. This includes maintaining separate checking accounts and paying business expenses from the business account and personal expenses from the personal account.
A few reasons why this is important:
• Cuts the time (and expense) of preparing your income tax return. Most accountants charge by the hour, and when there is co-mingling of accounts, the sorting of information and rounds of questions that result can pump up the preparation time significantly.
• Facilitates assessment of your business’ operations. If you have nonbusiness activity on your books, it makes it difficult to tell if you are running a profitable or efficient practice. If you have a solid set of books, it’s very easy to produce financial statements for a bank loan or year-end tax planning.
If an IRS auditor notices co-mingling of accounts, he or she will have increased doubts of the validity of your deductions. An auditor is likely to believe that not all personal expenses were excluded on the tax return. The auditor will most likely demand documentation for each deduction on the books including the purpose of each expense.
• Helps limit liability. If you do not keep separate books and records, it may be hard to prove that you (and your assets) are separate from the business in the case of a malpractice suit. (It should go without saying that you should consult your attorney for guidance on this issue.)
Oversee the administration
Lately, it seems there may be more of a risk of embezzlement than usual. Small offices cannot apply the segregation of duties recommended to ensure a minimal risk of fraud or error. However, there are steps you can employ to mitigate the risk to some degree.
• Review your bank reconciliation and watch for checks made out to names you do not recognize.
• Make sure employees take vacations and their duties are performed by other employees to the extent possible.
• Track inventory and compare to periodic physical counts.
• Open and sort the mail yourself so you are aware if vendors or a taxing authority are sending late payment notices.
Manage debt
It may be useful to borrow money at various times. For instance: If you carry accounts receivable, it may be necessary to fund the operations of the business with a line of credit, or you have student loans that allowed you to enter your field in the first place.
It’s advantageous to pay off certain debts before others for a variety of reasons, both economic and tax-related.
• Student loan interest is deductible, but only if your adjusted gross income does not exceed $50,000 (single) or $100,000 (married filing joint). If your income is above this threshold, it is advisable to pay down student loans first.
• Mortgage interest is deductible, but only up to the first $1.1 million in indebtedness. It’s often believed that any debt secured by a home is tax deductible, but that is not true.
Further, some mortgage interest is not deductible in the alternative minimum tax calculation. You should contact your tax professional to discuss the tax ramifications of your home mortgages especially since the IRS is auditing this area with increased frequency.
• Business interest is deductible in determining the profit in your business. It is advisable to pay down the business debt with collections and profits earned in your business before paying down any personal debt. Banks will be reluctant to approve business loans when they are being used to fund personal obligations.
Review your legal documents
It can give you great peace of mind to know your affairs are in order before it’s too late. Not only is a last will and testament important, there may be other things you should consider, too. You may want to discuss the following with your attorney, tax preparer, or insurance agent.
• It may be advisable to get an umbrella insurance policy.
• What will happen to your practice if you die? Do you have partners? What if your partner dies? You should take proactive steps to ensure continuity for the sake of all interested parties (spouses included).
• Is your income stream protected in the event you become disabled? Some insurance policies will only pay out if you are unable to perform any work. Other policies protect you if you can’t continue to work in the same field in which you are now.
• Would establishing a trust help you protect assets from estate taxes or protect them from creditors or lawsuits?
• Are your articles of organization or incorporation set up to ensure the maximum legal and economic benefits? Is your business optimally organized (LLC, partnership, corporation)?
There are many more topics on finance that can be visited, but hopefully the areas above give you some ideas or a start in the right direction.
Marion DeMaria, CPA, is a partner for Hooper Cornell P.L.L.C., a CPA firm located in Boise, Idaho, specializing in healthcare services. She can be reached at 208-344-2527, mdemaria@hoopercornell.com, or through www.hoopercornell.com.
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