Dr. John Smith, age 40, making $500,000 a year in income, after researching income tax reduction solutions/supplemental benefit plans decided that he would like to implement such a plan. Dr. Smith is terribly excited about a plan that will allow him to put away $75,000 a year in a tax favorable manner for use at a later time.

Dr. Smith works in a 20-doctor practice and, after researching the tax reduction plan, goes to his partners and tells them that he wants to implement a plan, that they will not have to pay for the plan, and that the plan does not require the inclusion of any other doctor or the employees. However, the plan, like all "advanced" income tax reduction plans, requires a "corporate deduction" and Dr. Smith, therefore, needs to have the partners approve the use of the corporation to implement the plan.

Dr. Smith even tells the partners he is willing to indemnify the corporation should there ever be any adverse consequences of implementing the plan.

Out of the 20 physicians in the group, five are younger non-partners who are also interested in the plan. Unfortunately, five of the founding members (who also make up the Corporate Board for the group) are over the age of 55 and decide among themselves after little or no review of the plan that there is no upside to them and, therefore, tell Dr. Smith that they do not think it is a good idea and that they will not vote to allow him to implement the plan.

Dr. Smith is beside himself and joins the thousands of doctors around the country in a similar situation where they work in medical practices (or hospitals) either as owners or as employees where the main physicians or the CEO who runs the group veto any plan that does not have an upside for those physicians or the organization as a whole.

The above scenario is a sad situation that I have seen too often. I would say that half the calls I receive on advanced topics are from doctors in groups in excess of five doctors (or employees of hospitals); and out of those who want to implement advanced income tax reduction plans, over half of them run into problems with their partners when asking for permission to implement a plan through the corporation.

The "perfect corporate structure" is fairly simple and several medical offices around the country already have the structure. Most multi-physician medical offices have a main company (usually a C or S corporation) that employs both the physicians and all the employees. Let’s call that the "mother" company. If a physician wants to implement any kind of income tax reduction plan, it must be done inside the "mother" company and, therefore, there must be an agreement of the partners to allow one or more physicians to implement such a plan. As I’ve stated above, it is virtually impossible to get five-plus physicians to agree to anything and, therefore, one physician has little chance of getting an agreement to implement any kind of advanced plan.

With just the "mother" company in place, all the employees take their income from the "mother" company, usually via W-2 income.

The "perfect corporate structure" exchanges a Professional Corporation (P.C.) for the physician as the entity to receive income that the physician would normally receive. So, instead of Dr. Smith receiving a W-2 paycheck from the "mother" company, the "mother" company would instead cut that paycheck to Dr. Smith, P.C. where the P.C. would, in turn, cut a paycheck to Dr. Smith.

Is it complicated to create a P.C. and have it paid instead of the physician? Absolutely not. If Dr. Smith has a contract with his medical office that says "Dr. Smith" will get paid whatever he is to be paid, Dr. Smith would simply re-do the contract to state that Dr. Smith’s P.C. will be paid his normal W-2 income as a consulting fee.

In Dr. Smith’s 20-physician group, Dr. Smith could be the only one getting paid to a P.C. or any or all of the other physicians (either owners or employee physicians) can do so as well.

Steps to Create the Perfect Corporate Structure

1. Dr. Smith creates a P.C. where he owns 100 percent of the interest in the P.C.

2. Dr. Smith rescinds his employment contract with the main medical practice.

3. Dr. Smith at the same time as rescinding his employment contract, signs a new "personal service agreement" (PSA) between his P.C. and the main practice where the P.C. hires out Dr. Smith’s services to the main medical practice. The PSA has the same salary and bonus structure as the contract Dr. Smith had with the main medical practice except that the PSA will also include the matching payroll taxes the main medical practice would normally pay for Dr. Smith. The transaction is expense neutral for the medical practice and for Dr. Smith.

4. Dr. Smith then takes all of his income through the P.C.

5. Dr. Smith then can write off whatever he wants in his P.C. without permission of his partners.

Note that this structure is not a way to carve a physician owner out of a medical practice so he/she can create their own 401k/profit sharing plan and not include the staff. Dr. Smith will still contribute and be tested for "qualified" plan purposes as part of the main practice.

Income Tax Planning

The biggest benefit to the "perfect corporate structure" is the ability of each physician to implement their own income tax reduction plan without having to beg for approval from the partners in the "mother" corporation. There are several different income tax reduction plans, almost all of which can be implemented in an individual physician’s P.C.

It is routine to find one physician out of several that wants to implement a plan, only to find out that his/her partners will not allow it.

What plans?

Long Term Care Insurance (LTCI): A physician for estate planning might want to 100 percent deduct their LTCI, which can only be done in any meaningful way in a C-Corp.

Equity Disability Trust (EDT): This plan is a way for physicians to buy supplemental disability insurance where the P.C. can pay literally $100,000+ premiums and anytime after the 5^th year receive a refund of their premiums (94 percent of the premiums) plus an investment growth on those premiums.

The ABC Plan: This plan allows a physician to defer $25,000-$300,000+ of the income that is owed to their P.C. by the main medical practice where the deferred money is allowed to grow at stock market rates and where the money can be used as a supplemental retirement benefit.

Potential Problems

The main problem with this structure revolves around Medicare. Medicare receipts can not be assigned and therefore Medicare money can not move to the individual P.C.’s setup by physicians.

How does that affect you? If a physician is in a medical practice where the expenses of the main practice (not including physician compensation) exceed what the Medicare receipts are, then there is no problem. The main practice would simply allocate that the receipts from Medicare be used to pay the expenses of the office.

This is a problem typically in an anesthesiologist practice or E.R. practice where there are very few or no employees. If that is the case, the perfect corporate structure will not work if all the physicians want to have their own P.C.s. However, if only some of the physicians in such a practice want to use the perfect corporate structure, then the Medicare money can be allocated to pay the physicians that did not want to carve out.

Why wait? If you are in a practice where you have no ability to do individual tax planning, you are costing yourself thousands in income taxes that could be saved or deferred via a non-qualified supplemental benefit plan.