By Bruce Bryen, CPA, CVA
As one works hard to develop a profitable lab with a stellar reputation, plans emerge about employee retention, profitability and retirement as the owner ages. Good financial advisors will have suggested that the enterprise adopt some type of employer sponsored qualified retirement plan as the business grows and employee stability becomes increasingly important to the dental professionals’ relationships. The lack of staff turnover is an important attribute for the goodwill and longevity of the operations for the shareholders as well as for any potential buyer of the lab and the continuity of business. Chances are that a deferred compensation plan has been instituted into the normal going concern activities and that it has assisted with keeping the labor force together. These loyal people should see good amounts of money waiting for them at retirement. These assets are accruing income in the lab’s own 401 k, profit sharing plan or possibly a simple IRA while the employees are working and increasing their time and responsibilities with the lab. These are the common kinds of retirement plans that accumulate wealth for the employees and owners. Those who work so hard and who have been with the organization for so long have a sum that is protected from creditors, that is available for them in the employer sponsored qualified retirement plan. Their input and recognition will empower the lab to have its value grow and remain productive. When it comes time for the shareholders or partners to sell the organization, there are some uses of retirement plans that allow “thinking outside the box.” Additional amounts of money invested into existing or new retirement plans are available with some innovative thought processes.
A typical transition for the sale of the lab will normally have a buyer wanting to write off as much of the purchase price as possible by allocating a considerable amount of the sale price to the equipment. This is an excellent approach for a buyer and probably creates an adverse consideration for a seller from a tax perspective. The buyer has the opportunity to write off all that is allocated to the equipment price at the closing very quickly to substantially reduce any tax from operations during his or her early years of ownership. The seller may have older equipment that is fully depreciated or his or her CPA may have written off the newer equipment very quickly with allowable rules for doing so. That seller must report a taxable gain on the sale of the lab equipment based on the low “book value,” (cost minus depreciation) that is of record in the business and properly reflected on the tax return of the lab. Almost every amount that has been depreciated for the seller will now have to be “recaptured,” in that proportionate dollar value attributed to the equipment and based on the sale price allocation on the closing statement or in the agreement of sale. If the owner was considering bonuses to long term, loyal employees, this approach may prohibit those disbursements because of the tax the owner will be paying. Also, if the thought was to have more funds available from the transition for personal use, the tax will substantially reduce that amount as well based on this format. The normal arrangement for any sale of a business is that the more advantageous the tax treatment to one party, the less assistance the other party receives. The hope is to try to arrange a sale of the lab so that both the buyer and seller achieve the best tax considerations that are available. This concept makes it easier to digest the consequences of the net amount needed and available for each party to the transaction. It allows more potential buyers to be available. The following is a consideration for an approach that does not affect the buyer negatively from a tax perspective, and substantially insulates a seller from a potential large income tax consequence at the time of sale:
If the lab has reasonable earnings and the owner wants more of a benefit from operations, there are additional retirement plan types that can be part of the enterprise. Most advisors shareholders recognize the problem with non discrimination testing of the labor force so the retirement plan receives acceptance from the IRS when they review the papers filed for its adoption by the lab. Because of this, the older employees must have a similar plan as the owner who would opt for a much larger contribution but would not want a comparable employee allocation. The following is one of the innovative parts to this concept: Employees can be grouped by job description and if it happens that younger employees fall into a certain category different than those older, a much larger contribution on a current basis can come to the owner using this kind of legal discrimination by using different types of retirement plans. A very sophisticated approach is needed but it works. By the time the owner is prepared to sell the lab, the amounts built into the allocated account for that person is much larger than if the 401k/profit sharing or Simple IRA concept was used. If the idea was not used during the business operations when it was managed by the owner, the concept can be employed when the transition is ready to occur. The next paragraph describes how that works.
The premise is to have a transition where both buyer and seller feel they each have not been burdened with taxes. If the idea is understood by advisors to the lab’s buyer’s and sellers, a sophisticated plan will be in place where buyer and seller will work toward its achievement. The ages and job classifications of employees is critical and an advisor to the lab who has experience with the design of the plan is needed. Lab owners who have profitable labs have built good relationships with their professional dental clientele. These people are a good source for reference to a CPA with this type of understanding.