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MONTHLY TAX NEWSLETTERFebruary 2016
If given the opportunity to purchase space for your practice, are you better off owning that space or opting to lease an equivalent space instead? While there are many variables to consider, owning could generally prove to be a much less expensive option over the long run.
Paying rent, utilities, and repairs and maintenance are expenses all practices incur. These Facility Costs are often the second largest expense grouping of a practice after Staff Expenses.
Practices seem to pay on average between 5% and 7% of their collections on facility costs. Smaller practices, less productive practices, and newer practices can see a higher percentage of their collections going towards their facility costs.
So what's better - owning or leasing?
Let's first look at the cost of leasing your space. For starters:
Many commercial leases are written as "Triple Net" leases, which means that you as the tenant pay the real estate taxes, insurance, and repairs and maintenance for the property you are leasing. Essentially, you as the tenant take on many of the financial risks of ownership. (This is very different from a residential lease where the tenant pays the rent and the landlord covers the various costs of ownership.)
Let's assume that you will be in practice for 25 years, and enter into a lease with an initial rent of $3k per month that increases over time with inflation. If inflation runs at 3% per year, you'll pay $3,090 in rent starting in year 2, $3,183 in year 3, $3,279 in year 4, and so on. In year 20, your rent will be $5,400 per month.
To be able to figure out whether leasing is less expensive than buying, we need to compare "apples to apples". To do so, we need to calculate all the costs in "today's dollars", which removes the effect of inflation. It's easy to understand the value of $3,000 today. Who knows what $5,400 will buy in 20 years?
For a practice entering into a lease for $3k per month over a term of 25 years that increases with inflation, that practice would spend $900k in today's dollars for that lease. ($3,000 * 12 months * 25 years = $900k)
That's a lot of money. Let's now figure out the cost of owning in today's dollars.
For this example, I calculated that you could purchase a $500k office space for a 20-years mortgage with a payment of $3k per month at a 4% interest interest rate. I also assumed that the value of the building will increase based on inflation of 3% per year, so will double in value over the 25 years you are in practice.
Here are the basics:
I then converted the 20 years of paying $3k per month to today's dollars, and reduced that total by what $1 million dollars 25 years from now would be worth today, and came out with a total cost of owning this property, in today's dollars, to be only $60k! That cost is essentially the real cost of the interest you will pay on the mortgage converted to today's dollars.
In this oversimplified example, leasing your space over 25 years is 15 times more expensive than purchasing an equivalent space.
Please note, however, that there are a lot of variables to consider when trying to decide whether to lease or own office space for your practice. Your CPA or our friends at Carr Healthcare Realty can help you run these numbers. The Carr team can also help you negotiate the lease or the purchase price for your office space, and believe it or not, the Landlord or the Seller pays their fee. Yes, Carr offers this essential business service at no cost to the practice owner.
We're pleased to share with you with links to the following recorded presentations available on MDTAXES:
RECORDED IN 2015
How should most kids and college students should fill out the W-4 form for their summer or part-time jobs. By claiming Exempt, your employer will NOT withhold any federal income taxes, so you’ll have more money in your pocket with each pay check, and won’t need to file a tax return next winter to get back taxes that were unnecessarily withheld .
While completing the W-9 Form for most businesses is very straightforward, that's not the case for LLCs. There are very specific rules that the LLC needs to follow to fill out the W-9 correctly.
Contributing to a 401(k), 403(b), or 457 plan AT WORK is one of the best tax shelters available to people during their working years. Amounts contributed generally reduce your taxable salary and grow tax-deferred. What if your employer does NOT make any matching contributions? In this case, the advice I routinely give is quite simple: No Match Does Not Mean No Good.
One thing I continually notice is that most kids who work are incorrectly having federal and state income taxes withheld from their wages. Please note that a working child will generally owe no federal income taxes unless wages earned exceed $6,300 (in 2015) and/or investment income exceeds $350. Needless to say, most of the kids are getting back all the federal and state income taxes withheld during the year. By claiming "exempt", these kids avoid having federal income taxes withheld, which gives them more of their paycheck sooner, and also avoids the costs and headaches of filing a federal income tax return to get back those taxes that were unnecessarily withheld.
RECORDED IN 2014
Every business is at risk of losing money to fraud and theft. This presentation details 8 steps that dental practice owners can take to prevent theft from their front desk staff.
RECORDED IN 2013
Physicians, dentists, psychologists, and other healthcare professionals can often times save some taxes by deducting their unreimbursed professional expenses. Check out this presentation to learn about a variety of professional expenses commonly deducted by doctors in the U.S.
Wondering which type of retirement plan makes the most sense for your practice? Check out this presentation on the most common retirement plan options available to practice owners. You'll also learn why it makes sense to set up and begin to max out your retirement plan savings as soon as possible.
The ten "million dollar metrics" presented in this video will provide general dentists with valuable insight to help improve their practice management. General dentists can learn which metrics to generate to gauge how their dental practice is doing, and then compare those metrics with other general dental practices, including those practices from the sample that collected one million dollars or more during 2012.
Learn to increase revenues and profits at your practice by implementing a Simple Incentive Bonus System. For short we call this SIBS. We've seen a lot of clients implement bonus system similar to the one presented in this video who saw immediate positive results within their practice.
Recorded Short Presentations on QuantiaMD:
We also have four three-minute multi-media podcasts, including insightful poll questions, available only on QuantiaMD:
And One Modest Attempt at Humor.
Editor's note: Please don't ask us why. Sometimes there are things in a person's brain that just need to come out. Please remember that we are tax accountants first, and I don't even know where comedian would come on this list.
Suggestions for Future Recorded Presentations???
If you have any suggestions for information you'd like us to include in our 2015 recorded presentations, please e-mail me.
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