Tax Strategies For The Private Practice Owner With Eric Miller Of Econologics

Minimizing your tax burden is vital to maximizing your cash flow. Every dollar NOT paid to the government (ethically) is a dollar that goes to you and your household. There are many opportunities to decrease what you owe, and in this episode, Eric Miller of Econologics shares with the Physical Therapy Owners Club audience the strategies they should be using to decrease as much of your taxes as possible.

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In this episode, I’ve got a frequent flyer and guest, Eric Miller, Chief Financial Advisor at Econologics . It’s been a while but it’s a new year. We’re getting started again. It’s cool to have you on. If you have been a reader of the show, you’ve read about Eric a ton of times talking about financial scenarios related to private practice. I was inspired to talk about tax strategies because someone in my coaching group mentioned it on Slack or something like that. “It would be nice if we had someone come talk to us about tax strategies, avoidance, shelters,” whatever you want to call it. I thought, “I’ve never had that conversation with Eric.” Why not bring you on and talk about that?

Let’s knock it out. I love it. It is an important subject. When you look at the amount that practice owners pay in taxes, probably 1 of the top 3 expenses that you have is the tax bill. It’s something that you should be aware of and know about and have some kind of a strategy to minimize it.

The way you and your predecessor talked about taxes I thought was cool. It’s important. The mindset that you have around it, I appreciate. That is to make as much money as you can. You shouldn’t be ashamed to pay a lot of taxes because that means you made a ton of money. Also, the tax code is a way of telling you, “This is how you avoid paying taxes. Follow our code.” It’s not cheating. Follow the code. They tell you how to avoid paying taxes.

Tax evasion is the illegal practice of trying to hide money. Let’s say you own a business. Someone pays you in cash and then you don’t even claim that you made that money. That’s tax evasion. Somehow, it is cheating in some method there. You don’t want to do that. It’s not worth it. It’s going to come back to bite you at some point in time because bad deeds always seem to be.

The strategy you want to implement is tax avoidance. That’s a legal practice of avoiding paying tax based on legal methods and means. I didn’t read anywhere in any government document or the constitution where it’s my obligation as a citizen to max fund the IRS. You don’t have to do that. A duty and responsibility that every practice owner should have is to try to minimize their tax liability. It’s good for you, your practice, your household, and everything.

A duty and responsibility that every practice owner should have is to try to minimize their tax liability.
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For those relatively new business owners, it’s important to have a particular mindset. We’ve talked about it before on this show. We talked about it years ago when the pandemic was going on but you brought it up before we pushed record. That is to make sure you are prepared and have a separate account set aside for taxes. Don’t commingle your funds amongst the general ledger. Talk to me about that a little bit.

This happens. It happened and it will happen again. It is where someone calls up. It’s April 15th and their accountant says, “Congratulations. You had an awesome year. You owe $75,000 in tax.” The person’s jaw drops and the pit of their stomach goes in the places you probably don’t want to know about. It’s unnecessary. The business does give you a tax liability personally because the profit of the business then transfers over to your personal, and then you owe the tax on the profit.

It’s incumbent upon every owner to realize, “When I’m factoring in my make-break number or how I manage the money of the business, I have to set aside a certain part of the revenue to go into a tax account.” How much it is is going to vary. You could have a year where you do a build-out or have huge expenses and your tax liability is not that big. It’s going to vary what percentage it is. That’s the thing where you have to develop a cadence with your CPA where you guys are meeting every quarter and saying, “Here’s our profit and loss so far this year. What am I looking at as far as taxes are concerned? What percentage should I start setting aside?”

Before we start looking at deductions or anything like that, you have to set up some systems so that you make sure you don’t have a surprise. You’re setting aside money to pay for your tax. From there, we can try to whittle that number down so you don’t know it all. Being prepared for it is important. It’s as simple as having a tax account. You can own it. It can be a business account or a personal account. It doesn’t matter. Have it designated as there and have the money go in there.

I’ve been on the other side of that phone call in the past. There were a lot of emotions going on. That was difficult to swallow. After it happened a second time, I was like, “The fact that it happened a second time was my fault and not the CPA’s fault. This is never going to happen again.” We’re going to have some more communication, meet more often, and have these conversations, “What does my tax liability look like at the end of this year?”

We would talk about it every quarter at a minimum. I make sure I have so much money set aside. He’d project based on last year’s numbers and this year’s numbers, “This is where I think it’s going to fall,” so you can set that aside. I highly recommend that. That’s great advice. What would you recommend also in terms of owners taking salaries and the tax benefits of that?

For the majority of PT owners, you’re probably going to be set up as an S corp of some kind or an LLC tax as an S corp. That allows you to take money out of the practice in a few ways. You can pay yourself a W-2 salary, which most people do for the “practitioner role” that they play.

If they’re not, what would you tell them?

If they’re not a practitioner?

No. If they’re not taking a salary. There are plenty of small business owners out there that aren’t taking salaries.

Be careful because you’re probably going to be in violation of this. It’s not necessarily a rule but you do have to pay yourself what’s called reasonable compensation. The IRS is trying to be clear as mud. What’s reasonable compensation? That would mean how much would you have to pay someone else to do the functions that you’re doing in your position. For a PT, what is that? That could be anywhere between $60,000 and $100,000 that you’d probably want to pay yourself.

Take the low end if you can.

That would be considered a reasonable compensation. If you’re paying yourself $10,000 in salary and you’re taking out everything else in profit distributions, that would probably get you into some hot water if you did that. I would take reasonable compensation. I see a lot of CPAs say that the amount that you pay yourself in salary has to be dead even with the amount of profit distributions. Those have to be even. I’m like, “I’ve never read where it says that.” It’s not true. If you have a successful practice, if you pay yourself $60,000 in W-2 and you want to take out $200,000 in draws or profit distributions, do that. There is nothing wrong with that. You would eliminate the extra FICA tax that you would have to pay if you had a bigger W-2.

What is the tax advantage of taking a salary? Aren’t the tax rates different for your salaried wage versus your distributions?

I don’t know if that’s going to affect your overall tax rate but it would affect the FICA tax.

You don’t get FICA tax on your distribution. There is a small tax advantage there.

There’s a tax advantage in doing that. That’s probably one thing you could do. It is how you classify the compensation that you have. Try to take out more in profit distributions and the minimum that you can do in W-2s.

I’m sorry. I got on a tangent there.

That was good. That’s important because I’ve seen a lot of people that take big salaries. I’m like, “Why are you taking such a big salary?” How much would it save them? Let’s say they’re taking $200,000 in salary or do it the other way around. That’s probably $5,000 to $7,000 of tax that they’re paying that they don’t have to pay by doing that. Not every tax deduction is going to be this huge amount of $30,000 or $40,000 but it all adds up. Most people are probably overpaying by about $20,000 to $25,000 a year, which is pretty crazy when you think about that.

I’d take an extra $20,000.

Do you want me to go through a couple more?

Let’s hear it.

Another one that is eligible for most people who have a high deductible health insurance plan would be a health savings account. For a family in 2024, it was $8,700 that you can put in a year. You’re taking money that you otherwise would’ve had to pay tax on.

This is pre-tax money that can go to the HSA, right?

Yes. As long as the money is spent on medical, you don’t have to pay any tax when you take it out. You get a triple whammy of tax benefits on the health savings accounts. I’m a big fan of the health savings account because it’s something that not a lot of people are taking advantage of. It’s a great way to pay for healthcare costs and such.

How does the Augusta Rule affect private practitioners? How strict do people need to be regarding that and having home offices?

The Augusta Rule is a method where you can rent your home up to fourteen days per year without being charged any tax on that.

The business can pay you for renting out your home fourteen days per year.

If you lived on a golf course, which is where it came from, those guys are renting out their homes for $10,000 a day for 14 days. All that money they’re getting is tax-free. That’s $140,000 a year of tax-free income. You’re thinking. “That’s great but I don’t have a house on a golf course.” You do have a business. If you have employee meetings, officer meetings, or something like that where maybe you go to a hotel or a restaurant, go to your home and do the same thing. The business then would pay you for the access to the house.

How much can you do? This is where you’re going to have to talk with your CPA. I wouldn’t do $5,000 every time you have a meeting unless you have a ton of employees. Why not $1,000? There’s $1,000 that you’re paying to yourself. It’s a deduction for the business of $14,000 a year. It adds up. It is the same with putting your kids on the payroll, which a lot of people have done before as well. You can put your kids on the payroll. Six years old is the minimum age that you can have them be on the payroll. Is it going to be a huge amount of money? No, but you get up to $10,000 or $12,000 maybe, depending on what they’re doing.

There’s a limit on how much you can pay your kid per year.

Before they start getting into the FICA tax, it’s up to $12,000 or somewhere around there. They got to do some legitimate work.

I would have my kids, if we printed newsletters, fold the newsletters. They’d put stamps on the envelopes and stuff like that.

You can take that money and put it into an account for them. You may open up a Roth IRA for them and make a contribution.

All of this is tax-free for them.

They can do that. All of a sudden, it builds up over time for them. It’s awesome. Another big one too for a lot of practice owners that own their buildings would be the accelerated depreciation of that building. The technical term is called cost segregation. In essence, what happens is let’s say that you bought a $2 million building or a $1.5 million building but you get a depreciation expense every single year. It’s spread over a 39-year period or somewhere around there. They take $1.5 million and divide it by 39. That’s your expense that you get every single year for 39 years. You get the write-off. That’s a great expense but why does it take so long? It takes 39 years for me to get that entire amount.

Are you going to hold it that long?

What you can have done is some kind of an engineering group come in and do an analysis of the building. The building is made up of windows, floors, and roofs. They have different classifications of how you can depreciate these things. Instead of taking 39 years, maybe you can get most of the depreciation in 1 to 5 years. That’s massive. We had a client that did that. He didn’t have a tax bill for 1 year or 2 because of that.

Do you know how important that is when you’re running your business to maximize the cashflow? You’re not getting an extra deduction. You’re taking it sooner and accelerating it. It’s the time value of money. You’re like, “I can do better things with that money instead of waiting for 39 years to do it.” If you do a big build-out, you can do cost segregation on that as well. It’s not just on a building. That’s a powerful one.

When you're running your business, it is important to maximize the cash flow.
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You said something there. If you don’t own the building and you do a bunch of TI, can that be cost-segregated?

I am pretty sure that you can accelerate that as well. That can be a sizable one for a practice owner.

That’s something that I’ve talked to my CPA about. He said, “1) It’s a good idea. 2) You want to do it sometime in the first 5 to 7 years that you own the business to make it worth it or that you own the property. 3) You want to do it especially when you have a high-income year.” If you know your tax bill’s going to be large, that’s the time to get your cost segregation.

It’s a cool “secret” out there. There are a lot of real estate investors who have told me, “I don’t need to make more money on real estate but I continue to buy more properties simply to get the cost segregation benefits in my taxes so that I don’t have to pay taxes next year.” These are guys that have tons of cashflow. They aren’t paying taxes because they’re using this strategy.

It’s pretty amazing. This is a benefit of owning real estate. You can do that so take advantage of it. It is something that most practice owners aspire to. It makes good sense to want to own your locations so that you can keep the real estate and rent them out at some point in time. It’s going to be part of your wealth-building strategy anyway. It’s not just an income source but it can be a great tax benefit as well.

It’s often said that you can write off a portion of your mortgage if you’re using office space in your home. Is that also recommended to write off the Wi-Fi at your home or maybe your cell phone and that kind of stuff and some of the personal things, or is that dicey?

CPAs get information that says, “This is a ‘red flag’”. Most of them, once they hear that, say, “Don’t do that,” without looking at the actual situation and saying, “Let’s see if we can work this out.” Maybe you set up some kind of a management company. Maybe there’s a legitimate way where you can take the home office deduction. People look at it and say, “You’re going to get audited by doing that.” Ask them, “Show me why. If we’re doing it per the letter of the law, then why shouldn’t we be able to do it?”

I find that with some of these advanced tax strategies, there are a couple that we’re looking at that have been scrutinized because people abuse them. I’ll give you one example. One’s called the 831(b) plan. You probably heard the term captive insurance company. 831(b) of the tax code talks about how you can set up your separate business or “insurance company” that would fill in gaps of risk that you have in owning the business that you don’t have insurance for.

A couple of examples would be brand risk. Most people don’t have insurance in case someone tries to attack their business brand or something like that but it is an insurable thing. You have to go through very legitimate companies to be able to take advantage of these things. Make sure that these are set up correctly and that money is being diverted. If you have a big profit year, you can take a portion of that profit and then divert it to a separate company that you own that is acting like your insurance company or reinsurance company.

This is how insurance companies were formed. Companies were like, “We have these risks. Let’s utilize the tax code to take profits off. To not have to pay taxes on them, we divert them over as an expense to our insurance company which we own separately from our regular business. We get the benefit of the tax deduction here and have money growing over here separately.” That’s what they call a captive insurance company. It’s captive. It’s owned by a separate business.

That was always off-limits. PT owners are like, “I don’t make that kind of money. I’m not going to be able to divert $1 million of profit over to that.” You can do 50,000 or somewhere around there. Maybe some people do have pretty profitable businesses that they could do that. It’s called 831(b). You have to go through a legitimate company to be able to do it.

We’ve had people that have done this. They diverted $150,000 to $200,000 money that they otherwise would’ve had to pay 40% profit on because they live in the great state of California or New York. They transferred that over to their reinsurance company with legitimate risks that this company is insuring for their business. It’s a win-win.

That money accumulates. What are you able to do with that money over time?

Generally, it will sit there and you can invest it. It’s got to be based usually on some kind of fairly secure investments. It could be treasury bills or some combination of stocks, bonds, or whatever that would be. It accumulates. Once you sell the business, you no longer need the insurance company anymore. You have to pay tax on the sale of whatever you have in there but it’s at a lower tax rate. It is at capital gains tax rates as opposed to ordinary income. These are all things that are legitimate in the tax code but not a lot of CPAs probably talk to their people about that.

I have to tell coaching clients, friends, and family, “You can’t expect your CPA to give you ideas on the tax code. Those CPAs are few and far between.” When you come at them with these ideas, they’re like, “You can do that.” You’re like, “Why didn’t you tell me?” They might hedge a little bit because they’re not clear on the tax code. Someone at some time might’ve said, “That’s a red flag. You don’t want to do that,” but you’re not sure why. As you press them, they might not be able to explain. What I’m trying to say is you can’t rely on your CPA to naturally bring these up as opportunities for you to say save on taxes but when you do, they’re like, “I can help you with that.”

I don’t know if their goal is to save you on taxes. For the most part, they want to make sure that you don’t get in trouble. They want to make sure that you’re compliant and that you file your taxes on time. It’s few and far between that someone goes out there. We had to look up all this stuff to try to find out. Everyone comes to us as financial advisors and says, “My accountant is not helping me with my tax liability. How do we do this?” I’m like, “I don’t know. Let’s go find out.” We try to look and say, “There are 10, 15, or 20 different deductions that you could take in combination with maybe a qualified plan that you have set up.” A 401(k) is simple. It could be something like that.

We didn’t even talk about those.

Most people probably have those. There’s nothing wrong with diverting a portion of your money into those as well. You can’t do 1 or 2 things. It’s got to be a combination of all these things, like the home office deduction, the rental of your home, paying your kids, cost segregation, or even travel. Try to tie in travel. Maybe you try to travel on a Thursday and then go home on a Monday. You have a business meeting in between there. You can write off a portion of the weekend wherever you’re staying. These are all things that you can do to help minimize your tax liability.

My brother’s tax strategy is to put everything on his business and then let it work out in the end. I don’t know if that’s the best strategy but he’s got a better mindset than some.

Who knows? There are some people that go to the extreme. Let’s say they bought a bike or something like that. They put their office decals on their bike and are like, “I’m promoting the business,” so they write off the cost of the bike. Some people go to extremes. You think you need to go to extremes but you certainly shouldn’t pay the amounts that most people are paying.

Since you brought it up, tell me about cars. What can you do to write off car payments or your car? How do you recommend that?

I’m a little outside of my knowledge of this.

Either they buy it under the LLC or lease it and lease payments go from the LLC.

There’s a certain requirement that I’d have to look up to see whether or not. I don’t. We don’t do that. I’m not driving around very much where I would legitimately be able to say that I’m using my car for other things besides a commute.

That’s the hard part. If it’s simply the commute, you can’t necessarily write it off. Maybe you’re driving between clinics during the week because you have multiple clinics.

If you’ve got multiple locations and you’re doing that, you probably have a better chance of making that a legitimate method of having to write off your car. Saying, “I’m going to drive back and forth to work, put the car, and write it off,” is probably not going to fly. I’ve seen a lot of people do that. They don’t care.

It’s not to say they’re doing it right but they are doing it.

There’s even more. There are deep, advanced strategies. There are a couple I’ve seen here where you can invest in these mineral mines and there’s an appraisal done. You invest as a limited partner. Let’s say I put $50,000 in and then there’s an appraisal done on this. You end up getting back, let’s say, four times what your investment is. I put in $50,000 but I get a $200,000 charitable deduction.

You don’t get the cash. You get the deduction.

Your money’s gone. That more than offsets what I would’ve had to pay in tax anyway. The tax code says what it says about these things. What’s your stomach for risk? We’ve seen a lot of people do some of these things. Some of it’s worked out and some of it doesn’t.

What kind of legal disclaimer do we need to put on this episode?

We should probably say that neither Nate nor myself, Eric Miller, are CPAs. You should make sure that you go and speak with your CPA before implementing any of the things that we talked to you about as we are not legal accountants or anything like that. That’s our disclosure right there

If people want to talk to you a little bit more about it, how do they get in touch with you? Do you have a PDF of this or are you going to create one?

I’m going to try to create something right here. I’m trying to work through what a good product would be for people when it comes to this. First and foremost, how to manage making sure that you’re setting aside money for your taxes, the frequency of how often you should meet with your CPA, what you guys should go over and should be looking at, and then maybe 15 to 20 different deductions that are available to you that you guys can take.

That’d be huge.

That’d be a good product for most people to have. In the meantime, they can go to Econologics.com. We got all other kinds of cool downloads as well.

You’ve got all the PDFs from prior downloads that you’ve referenced in the past as well. There’s plenty of good material there. Thanks for joining me again.

It’s good to see you.

It’s always good.

That was fun.

I’ll see you soon.

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