Welcome to Dental Unscripted.
Where Mike Dinsio and Paula
Quinn break down the
practice ownership journey,
one episode at a time.
Starting up, buying,
and running a successful dental practice.
What up, what up, guys?
Welcome back to another
episode of Dental Unscripted.
As you guys know, this is Michael Dinsio,
one of the co-hosts of the program.
And I,
if you guys are big YouTube followers,
I'm sitting in my living room,
so the sound is not my
weird podcast booth that I sit in.
uh but that's just how
today's going um and so
here we go uh so yeah
today's I'm super excited
about today because we are
um me and a friend of mine
that's uh big into the
accounting world I refer a
lot of clients over to
we're gonna uh digest
everything that goes into
the allocation schedule
when buying a dental practice.
And so we're going to break
this kind of this idea,
this topic of allocation schedule.
But first,
before we do that little housekeeping,
And before I bring on my guest,
I'd like to invite you guys
over to the Dental
Unscripted channel if you
haven't already done that.
So I've talked to a lot of
you on the phone that are
followers of the program
and you haven't done that.
Do it.
We will stop publishing on
Dental Acquisition
Unscripted and we will stop
publishing on Startup Unscripted soon.
So please jump over there.
to Simply Dental Unscripted, the channel,
because we're just bringing
both brands and both channels into one.
And we are going to be
talking all things start, all things buy,
and also how to run a
dental practice as well.
So please join us over here, like, comment,
subscribe, all the things.
okay without further ado
let's bring in morgan
hammond uh morgan is has
been working with me for
many many years on lots and
lots of deals he's a wealth
of knowledge um morgan
welcome to the program man
how you doing thanks
michael thanks for having
me it's good to see you again
Yes, sir.
Why don't you tell us a
little bit about your firm?
I know you guys just went through Emerge.
Congratulations again.
I mean,
you guys started a fantastic
accounting firm and just
brought in more resources,
which is exciting.
But why don't you give
everybody like a breakdown
of what you're doing today
and what the company is all about?
Yeah, you bet.
We started in twenty ten as
HD accounting group.
And so we've been at it for
fifteen years supporting
dentists who own their
private dental practice,
very much a niche firm.
And as we've grown and scaled, you know,
we decided we were at a
point where we wanted some
additional resources in the
form of technology and staffing,
which is always important
and accounting and tax.
And so.
We recently combined with a
top-twenty firm, Eisner Amper,
and they have organized us
in our dental-specific subsidiary,
Eisner Advisory Group Dental Advisors.
I'm the partner in charge.
I have all my team.
We're still doing our same core services,
which is the monthly accounting,
the profit advising, and the tax planning,
only now we get to offer so
much more and have a more
comprehensive experience for our clients.
As an example, this morning,
We just sent an announcement out.
We can do cost segregation studies now,
and we already have.
That went out at nine this morning.
We already have like three
doctors that are saying, hey, look,
we want to talk.
So we can add a lot of value
as part of Eisner Amper now.
So it's been just a natural
progression as part of our journey,
but it's still very specific niche,
private dental practice owners only.
That's our world.
I mean, just cost seg,
picking cost seg up is huge
for the listeners.
It's huge.
Yeah.
And the price point's great, too.
I mean,
it's just it's we're super excited.
And so we're just getting
started with that.
But it's been it's been really,
really wonderful.
I love it, Morgan, man.
Congratulations on that success.
The first question I asked you was,
is the fee structure going to change?
Is the service going to change?
That's always the big question.
My clients that we sent over
just more recently, the answer is no.
Same people, same service,
same responsiveness.
We all have the same tools.
We just get to add a lot more to it.
That's awesome.
Well, let's get into this topic,
allocation schedule,
because it feels like every
day I have to kind of get in and I'm like,
look, I'm not a CPA.
I just know enough to be dangerous.
And I thought, well,
let's get a CPA on the
program and let's just kind of
diagnose this kind of issue
the first thing the first
thing to hit what is it
what is it what is it yeah
as you know you're you're
heavy into the transition
space we're not in the
transition space we
certainly advise on it and
um when it gets to to this
particular topic so the the
first point of negotiation
is the price of course
And then once that price is agreed to,
then we have to decide, okay,
how are we going to
allocate that price among
the various assets that are
being purchased?
Because these are all asset
purchase agreements.
So broadly speaking,
there is the used equipment.
There is the patients.
there's a promise not to compete.
And then we might, you know,
generally it doesn't get too granular,
but you know,
you might break it down to
some supplies and sometimes
they might say, well,
this is medical equipment
and this is furniture,
but I kind of group those
as fixed assets.
So there's,
there's generally like four or
five main categories where
that purchase price will get allocated.
And I've even seen website
thrown in there too.
Sometimes you can get as
granular as you want.
I, you know, I think of it,
Honestly, Michael,
if you break it down and
you and I both know,
there's two main categories.
It's the fixed assets and
it's the goodwill.
Just so you know,
the promise to not compete,
that should never be more
than five thousand bucks.
It should just be a nominal amount,
but it's usually just the
assets and the goodwill.
Morgan, can I ask you, like,
why do some people get more
granular on the topic?
Like what,
what's the purpose of chunking
this thing up?
Cause you're right.
It's like, okay,
there's the equipment and
then there's the goodwill
and that's really it.
So why do they,
why do they do that with the goodwill?
Oh, well, with the goodwill,
it's very important.
And we'll talk about that
consideration with the seller.
But if people want to get
granular into the website
and I've got these supplies
and you've got to buy, you know,
I don't think it serves
much of a purpose.
It doesn't really have a
material impact on the taxes.
And so when you see an
agreement put together by, I think,
somebody who does a lot of
dental transitions, you don't see it.
broken down like typically
it's yeah it's four or five
categories well I have seen
brokers get more grand and
I'm like why are we doing
this but I I felt like they
had a reason for it but not
not really so if we think
about it and I um there's
two two perspectives and
they're very different
there's the the seller
perspective and the buyer perspective
And within each of those roles,
there's competing objectives, right?
So what's the buyer,
what's good for the buyer
is the opposite of
typically what's good for the seller.
So I think maybe we start
with the seller because-
So wait, let me recap.
So so the allocation schedule,
just kind of throwing it
out and just making this
super simple is you got the
purchase price.
Let's just say a million bucks.
And we have to define how
much of this million
dollars of the purchase price,
whatever it is.
is broken up into hard assets,
which is the equipment, and not so hard,
soft assets,
which is what we all call is goodwill,
right?
Intangibles, you bet.
Intangibles.
And the other thing we might
want to throw in here, Michael,
is that this is an asset
purchase agreement.
They're almost all asset
purchase agreements.
So when you buy a dental practice,
you're not buying that dentist's company.
You're buying their stuff, right?
And you're going to put
their stuff in your own
brand new company.
And you're going to start day one as your,
whatever,
whatever PLLC or PC you set up
for yourself.
So you're just buying their assets.
And that's why it's an asset
purchase agreement and why
we're allocating those assets.
So versus, versus, and I know,
but just for the audience
versus a stock sale, right?
A stock sale,
which is a horrible deal for the buyer.
And you should never do that
because you can't,
a stock sale is not
deductible for the buyer because,
And then you're on the hook
for all prior liabilities of the seller.
So if they didn't pay their
payroll taxes from years
ago and didn't disclose it,
it's still your problem.
So you almost never see a stock sale.
I don't either.
So can you say that a little
bit more simple?
So everything that we touch
and I honestly don't think
I've ever done a stock sale.
stock sale is you're buying
the other dentist company
so if it was abc family
dental llc you're buying
their stock certificates
and saying that is now my
company okay the problem
with buying stock it's just
like buying stock on the
stock market you can't
deduct that it's
non-deductible so the
allocation schedules moot
point with this doesn't
matter you're taking their
balance sheet you're also
taking all their liabilities
Yeah, liabilities, taxes, all the thing.
But I have heard of some
stock sales before when like very,
very unique situations, right?
The only time I've heard of
it and seen it is if
somebody's selling a piece
of their practice.
And so they want to sell
maybe fifty percent of the
stock if they have an existing S Corp,
which that Michael's a
whole separate podcast.
So adding a partner is a whole, whole,
whole new topic to visit about.
OK.
But so I will just call it
ninety nine percent of the time.
It's an asset purchase.
You're buying the doctor's assets.
You're buying their their
fixed assets and their tangible assets.
You're going to put them in
your own company.
Perfect.
Yes.
So because the show has
gotten more broad over the years,
it's not just buyers that are listening.
If I helped you or if you've
been listening for five years,
I'm getting calls today,
my younger docs wanting to
sell to DSOs or, hey, look,
ownership's really not for me.
I think I just want to sell
and go back as associate.
Totally fine.
Let's start.
Let's hit both buyers and
sellers because Morgan,
you might be helping sellers.
I primarily help buyers buy,
but let's let's hit the buyers first.
Let's hit the buyers first
and then we'll talk.
And I think it's important
whether you're a buyer or seller,
it's always helpful to know, hey,
where's the other side coming from?
That's right.
What's keeping them up at night?
That's right.
So for the buyer,
this is the key is a key concept.
On an asset purchase agreement.
As the buyer,
you get to deduct a hundred
percent of the purchase price,
no matter what.
Say that again,
because that's something I
say on every deal and it
needs to just sink in.
They oftentimes hear that
just because the hard
assets are lower in value,
that they're not going to get right.
I'm missing out.
And so, and this is the,
as a new business owner,
also an important key concept,
you always get to deduct.
a hundred percent of every
business expense.
It's just a matter of timing of how soon.
Yes.
So that that's where you
start as the buyer,
no matter what you get to
deduct the whole price in all cases.
Yeah.
So,
so when Morgan says that it's twenty
percent equipment,
eighty percent goodwill.
OK.
The buyer the equipment that
twenty percent you get to
deduct that Either right
away or over five years
That's the choice so as an
example medical equipment
is ductable five years or
You can say everyone's
heard of section one
seventy nine that says
let's let's just deduct it
all right now the goodwill
Eighty percent of the
purchase price that that
must be deducted straight
line over fifteen years.
So that's why you'll you'll
hear people say, well, as a buyer,
you want a high amount to fix assets,
you can deduct it all right
away and then you can you
can have your let's just
say you'll have your party
a little bit earlier.
Right.
You only get the tax deduction once.
Do you want it sooner?
Do you want it later?
But you still get to deduct
the whole thing no matter what.
So it's just timing the fixed assets.
It's more accelerated.
You can do it now.
goodwill over time for
fifteen years okay so so in
in reverse morgan in
reverse here so you get to
write off the whole thing
it's just how long do you
spread it over time right
it's kind of like a loan
the more you spread a loan
payment out the smaller the
payment is the
So that's essentially that amount,
if it's goodwill,
that smaller amount is the
write-off every year.
That's what I heard.
Correct.
So just to say it again,
because I think you may
have broke out if that was
on my side or your side.
Yeah.
So for hard assets, it's how many years?
And for goodwill, it's how many years?
So there's a schedule.
It depends on the type of hard asset.
The biggest one,
the most consequential is
the medical equipment.
The accelerated, the rules,
the accelerated
depreciation is five years
for medical equipment.
Okay.
Or you can say, tell you what,
let's forget that five years.
That's what section one-seventy-nine is.
That says, you know what?
You bought this used equipment.
Let's deduct it all this year.
Let's just take it all right now.
So it could either be
instant or spread out in the short term.
And then whatever's
allocated to Goodwill is
straight line over fifteen years.
Okay.
So as short as five years
with hard assets,
And then as short as fifteen
years on Goodwill.
Yeah.
Okay.
All right.
So the other thing I want to
comment on is when we kind
of separate topic,
but similar when we're
evaluating or coming up
with true profit of a dental practice.
This is an interesting little thing.
Everybody always asks me
about depreciation and amortization,
right?
So can we hit that real quick?
Because isn't it, it's related here,
is it not?
So that's what we call,
we put that what we call below the line,
right?
So if we're talking profit
margin on a practice,
that's before you look at
depreciation amortization.
So we do not factor that in.
If we're analyzing a
practice for profitability,
the depreciation and
amortization is not part of
that discussion.
That's the owner's tax situation.
Same thing with like the
owner S-corp salary, that's irrelevant.
So if the practice collected
a million dollars,
and has a forty percent
profit margin before owner
comp before depreciation
before amortization I mean
there's four hundred k in
profit for the owner so we
don't we do not factor in
depreciation and you know
you'll hear the term ebita
and that's what they're
talking about their
earnings before interest
depreciation amortization
because it doesn't matter
like whatever the seller
whatever their whatever they chose
to depreciate their assets
because you do get a choice
whether you want to do
bonus or section one same line.
That's irrelevant to how the
practice is performing financially.
That's just the owner's good
deal write-off.
It's just kind of another line.
It's not an actual bill.
It's their strategy,
the seller's strategy.
But
is it true that goodwill is
related to the amortization
is that a true statement or
because depreciation is uh
yeah the relation and
amortization yeah go ahead
depreciation you'll hear
depreciation more related
to like a fixed asset
because it depreciates like
it's worse less over time
or amortization over a
period of time they're
really referring to the
same thing they're non-cash deductions
So let's say you're
deducting your goodwill
over fifteen years.
You get to year ten,
so you still have the
practice at that time,
and you still have your
one-fifteenth tax deduction
on the goodwill.
That didn't cost you any money.
No.
You spent that cash ten years ago.
But is amortization goodwill
and depreciation hard assets?
Yeah, that's a good way to think about it.
But it's the same thing.
It's a deduction.
They're both deductions.
That's perfect.
Okay.
All right.
So I wasn't really planning on going there,
but since we had an account on the phone,
you might as well go there, right?
Okay.
So back to the buyer's perspective.
So essentially now we've got
our asset groups, Goodwill, hard assets.
We've got the schedule now
that you've laid out seven or five years,
seven years, fifteen years,
depending on what the
accountant wants to do.
And that's your job for them.
Let's talk about like.
I mean, what's the bridge there,
any other things that
you're thinking about as
far as like the buyer goes and what they.
So this is what I think
about for the buyer,
and I think to really understand
like where to go for the buyer,
you do have to have some
knowledge of where the
seller is coming from.
And so I'll just touch
briefly on the seller's
perspective because that's
going to inform my advice to the buyer.
So for the seller,
when they go to sell a practice,
that's a significant taxable event.
And the first question every
seller is going to have is
how do I minimize the tax bill?
And the answer is there's
really not much you can do
because they owe gain,
they owe income tax on the gain realized.
And the gain is the
difference between what the
buyer's paying them
and what's called their tax basis.
And their tax basis is what
they originally paid less
what they took in depreciation.
Well, let's not get crazy.
We're getting crazy.
Simple example.
Let's say somebody buys a CEREC machine,
okay, a hundred,
a hundred and fifty thousand.
And let's say they choose to
depreciate the whole thing right away,
right?
I'm taking section one seventy nine.
I'm writing that whole thing
off this year.
So if they buy it for one
hundred fifty K and they
take one hundred and fifty
thousand in depreciation,
their tax basis is zero.
Right.
If they bought bought it for
one hundred fifty and
accelerated over five years
and that's going to be over
time and maybe by year two,
it's I'm just pulling
numbers out of the area,
but it's down to like one
hundred thousand.
So if their tax basis,
if they depreciated fifty,
their tax basis is now one hundred.
So.
That's the math.
Right.
And so whatever you get paid.
So back to my example,
they bought the CEREC.
One hundred fifty K. Let's
say they kept it.
They deducted the whole thing right away.
Tax base is zero.
Two years and they say, you know what?
This isn't for me.
I'm going to sell it used.
And so they sell it used for
eighty thousand.
Well,
if their tax basis is zero and they
sell it for eighty thousand,
they just pick up eighty
thousand in ordinary income.
It's called depreciation recapture.
They got to pay income tax on it.
So the same thing applies in
the aggregate when you sell
a dental practice, right?
And you look at that
allocation and let's keep it real simple.
Michael,
we've got the million dollar practice.
We got two hundred K to
equipment and eight hundred
K to goodwill.
If the tax basis on their
equipment is fifty thousand.
And the purchase price has
two hundred allocated to equipment,
they just picked up one hundred and.
Fifty K of what they have to
pay income tax on.
You can't change it.
There's no there's no hiding from it.
There's nothing that can be done.
So for the seller,
where we get into competing objectives,
the same thing applies on the goodwill.
If it's a startup,
there is no basis in goodwill.
They owe gain on eight
hundred thousand in that example.
But the difference is the
gain on goodwill is taxed
at favorable capital gains tax rates.
So if they're in the thirty
seven percent tax bracket,
the gain on equipment is
taxed at thirty seven percent.
Yeah.
The gain on the goodwill is
taxed at twenty percent.
So.
The only way the seller can
influence and lower their
tax bill is to push for a
lower allocation to equipment,
because that means a
smaller percentage of their taxable gain
is taxed at that high
marginal tax rate so it
doesn't dramatically alter
the tax bill but it does
influence it so that's why
I you know our clients have
heard me say the allocation
is a bigger deal for the
seller than it is for the
buyer yeah and and I you
know I think the buyers at
the at the time like
I think at the time that the
buyers get to the place
where you pick them up,
looking at allocation
schedule and they're
getting ready to close and
you're talking to them
about accounting and
bookkeeping services and
they're just exhausted, right?
They're exhausted.
They just got their butts kicked.
That's how they feel, right?
They tried to negotiate the
price they may have lost.
We started chipping away at the ARs.
We won a little bit there.
Then they started getting
into the work in progress
and all the little things.
And then the lease,
the lease starts kicking
them in the shorts.
And by the time they get to you,
they're like,
I just want to win somewhere.
Right.
And then there you are like, well,
you know,
you get a little benefit to
juice the hard assets and
then they lock on to that.
The truth is, this is a big,
big deal for sellers and a
very little deal for the buyers, right?
It is.
And so to kind of circle this back around,
For the buyer, just keeping that in mind,
the more you push them on
bumping up the fixed assets
so you can have your bigger deduction now,
you're driving up the
dollars on their tax bill.
You're literally on the seller's tax bill.
And it's going to be a big tax bill.
It's sometimes shocking for the seller.
You're driving up the actual dollars.
So you just have to be mindful of that.
And we're not in the transition space,
Michael.
You've already counseled
them through this process.
And by the time they're
asking me about allocation,
I will tell them, look,
it comes down to a meeting of the minds.
let's say that the the
seller you they've arrived
at like fifteen percent to
equipment and I I'll I'll
ask the the dent to say I'm
you know they're looking at
hiring us as their
accountant after they're in
ownership and I'll say well
how do you feel about that
practice you know do you
see yourself there do you
like it does it check every
other box does it feel good
if so like you may not want
to jeopardize the deal over allocation
Because you still get to
deduct the full purchase
price no matter what.
And the other thing, Michael, is this.
Let's say they're buying a
practice and this buyer has
maybe a more expansive
skill set than the seller.
And so some of the stuff
that was being referred out,
they're going to start doing.
That's production they're not paying for.
They're going to make more money.
And they're going to make
way more money than they
made as an associate.
And so if even though maybe
a higher percentage of that
goodwill gets pushed off
for the next fifteen years,
when you're making more money,
those tax deductions become
worth more when you're in
higher tax bracket.
So it's not all bad having
some of that hanging out in the future.
I didn't even think about that.
So if the plan is for you to
make more money in the future,
it's great to defer some of
those tax write-offs to the future.
And I will say this, as an ex-banker,
you usually pay your loan
off in eight to ten years on average,
right?
Those were just statistics
when I was a lender.
So in eight to ten years,
when you don't have that
loan payment and you don't
have that interest
write-off anymore that we
all love to take advantage of,
that allocation schedule
could be the difference maker.
So I didn't even think about it.
Yeah, it doesn't, you know,
people get very excited
about Section one seventy nine,
which again, just to recap,
all Section one seventy nine is, is
Hey,
the rules are if you buy medical
equipment,
that's depreciated over five
years or section one, seven, nine.
Forget that.
Let's just deduct it all right now.
And so if you're making, say,
your practice profits,
four hundred grand and you
buy that CEREC and that's
one hundred fifty thousand
dollar deduction that like
that's that feels pretty good.
Like I'm having that party like right now.
And you're going to have
very favorable tax rules that year.
But but let's just say, OK, we do that.
But you're, you know,
two or three years from now.
Maybe we're not making four hundred.
Maybe we're making seven hundred.
You're going to be at a
higher effective tax rate.
And if you still had some of
that CEREC deduction hanging out,
that tax benefit is
actually worth more money.
So it's not always...
It's not always a bad thing to,
to push those off.
I love, I love what you said there.
So everybody always talks
about section one, seven, nine,
when you go to the trade
shows and like right now,
the Invisalign is, or a line,
I should say a line tech is
coming out with this
Illumina and they've got
some sweet deal and everybody's,
this is the rage.
And like a hot minute ago, like,
It was something else was the rage.
There's always going to be a rage.
And then the salespeople
always love to talk about this.
Section one.
And you're right.
Everybody gets super excited about it.
So what's the longest you can stretch?
Because everybody talks about how,
like you said,
let's have a party and not
pay any taxes this year.
By putting it all in one year next year,
I tend to think let's bank it over time.
So how long can you stretch
one seventy nine out?
It depends on what you're buying.
But again, medical equipment,
it's five years.
There's no discretion.
It's hard rules.
It's like it's like the goodwill.
It's fifteen.
There's no there's no option A,
B and C. It is what it is.
But you could do all of it
in one year or you could
divide it by five years.
In the year of acquisition,
you have a choice.
You could say,
let's take half now and then
deduct the other.
But whatever's left over is five years.
You cannot say, hey,
let's just start with five
years and we'll get to year two.
Then let's take the whole thing.
No.
The year of acquisition,
you can choose to take all
or a portion of section one
seventy nine and then
whatever is left over,
if there's anything left
over is five is five years
and it can't change after that.
OK, so so so for simple math,
I've got two hundred thousand dollars of
Hard assets.
The allocation schedule,
it was a million dollar practice.
Let's say it's eighty twenty.
Eighty percent was goodwill.
Twenty percent was hard assets.
So I've got two hundred grand.
If you're following my math,
the very first year of the acquisition,
I didn't know that half of
the two hundred could be
written off the first year
to be a hundred grand.
And then you would divide
the other hundred grand left over five.
It has to be over five for
medical equipment.
So, OK,
so twenty grand a year and then
that would be the schedule, essentially.
Yes, it's accelerated.
So it's not linear.
It's accelerated to geek out.
It's double declining
balance depreciation.
So it's not linear on the equipment.
Now,
the goodwill is straight line over
fifteen years.
okay okay but in theory like
give or take that's kind of
how people should think in
general yeah okay but
here's to to um go back to
what you said you know okay
we're you know it's your
end the equipment's on sale
and if you hear anything
like well you don't want to
miss out on section one
seven like you never just
for for all practice owners
out there you never miss
out on anything it's all just timing
You know, if you don't get it this year,
you get it next year.
You never miss out.
And again,
if you're going to make more
money next year,
the tax benefit is more dollars.
It's actually worth more.
So I don't get wound up about that.
The other thing,
just a very key concept of
section one seventy nine is
just ordering the equipment
doesn't doesn't count.
It has to be placed in service,
which means delivered and
in a ready condition.
So it has to be installed.
It doesn't mean you have to have used it,
but it has to be installed
to be deductible in that tax year.
And the other thing that
people can sometimes get
confused about is, okay,
what if I get a loan?
Does that spread the tax deduction out?
Or what if I pay cash?
Your method of payment is irrelevant.
If you buy a piece of
equipment and it's placed
in service that tax year,
that's when you can depreciate it,
whether you do the whole
thing or spread it out.
Whether you got a loan or paid cash,
it is irrelevant.
that uh that's really good
like we this is exactly
what I wanted out of this
episode um just as kind of
a fun little bonus and
since we're since we're
into it and we've kind of
funneled it all the way
through hard assets yeah
you mentioned startup yeah um
Because I do have a lot of
startup listeners and
they're listening to this as well,
potentially.
How does cost segregation,
because we mentioned in the
beginning episode,
how does that play into this strategy,
if at all for an
acquisition or a startup?
So cost seg is for when you
start talking about real
estate and let's think commercial,
non-residential commercial real estate.
So you buy your practice,
build your location.
When you purchase
non-residential commercial real estate,
that gets depreciated
straight line over thirty nine years.
That's a long time.
Thirty nine years is thirty nine years.
So that's a very small tax deduction.
So one question I get often, Michael,
as well, you know, from a tax perspective,
should I buy or should I lease?
And I tell people, look,
it's like the tax should
not move the needle on that decision.
You only want to buy real
estate if you want to be in
the commercial real estate
space and you want to own real estate,
invest in what should be an
appreciating asset,
realizing there is risk.
know a good buddy of mine
bought he bought his real
estate it was a good move
for him it was a a bank
building he converted into
a dental practice it's
beautiful michael six
months into it the city
came and made him repave
the parking lot that was
two hundred fifty thousand
he's like what I wasn't
planning on that so that I
mean those are the things
you gotta think about when
you own the real when you
own it it's your problem
So there's risks involved.
So you only want to own
commercial real estate if
you want to be in the
commercial real estate
space and you want to
invest in what should be an
appreciating asset.
That's why you own real estate.
Don't do it for tax
write-offs because your
mortgage interest and your
one thirty ninth depreciation,
if you compare those to
what your lease payment would be,
and lease payments fully deductible,
it's not a huge,
it's not a big enough difference,
in my opinion,
to be a significant decision,
factor in decision making.
But let's say we go down that road.
We say, you know,
I really want to own my spot.
And you purchase it,
you either do a ground up, build it,
or you substantially remodel it.
So again, whatever the cost is,
whatever dollars you spend
on the improvements, not the land,
but the improvements,
you get to deduct the whole price.
It's just a matter of time.
You get to deduct a hundred percent.
So what a cost segregation study is,
is that's when engineers go in,
it's a very specialized
work and they break it down.
They look at every,
every dollar you spent and
they look to substantiate and reclassify
those expenditures to fix
assets as opposed to real
estate improvements to take
it from a thirty nine year
depreciation schedule to
maybe down to a five or seven.
Essentially,
it's like slicing up the asset
so that you could find
things within the building
that could be depreciated sooner.
And a good example of that would be,
I hear this one a lot,
I bought a building and I
bought cabinetry and dental cabinetry.
And so let's get dental
cabinetry accelerated,
not on thirty nine years,
but on five or seven years, right?
Or five years, rather.
So what a cost seg study does,
it does not create new tax deductions.
It just accelerates them so
that you can have them now
because you likely will not
own that building for thirty nine years.
Right.
Now, here's the other thing, Michael.
Let's say somebody doesn't
do the cost seg and say, well,
I just didn't think about it or just,
you know,
was on the to do list and just
never did it.
Not the end of the world.
Let's say five years, five,
seven years later, they go to sell.
They sell the building.
Well, whatever your cost is.
Right.
Let's say they paid eight
hundred thousand for the building.
And let's say, you know,
they forgot to do the cost seg.
And so they're just
depreciating one thirty ninth.
Right.
And whatever time left,
let's say they've
depreciated two hundred thousand.
So they paid eight hundred.
They depreciated two hundred thousand.
They have six hundred K tax basis.
And then they turn and they
sell it for nine hundred thousand,
turn a nice, handsome hundred K profit.
They will owe capital,
long term capital gains.
On the difference between
nine hundred and six hundred.
So the reason I give you
that example is if they
didn't take the cost seg,
their their tax basis is higher.
They're going to pay less
capital gains when they
sell the practice.
Right.
You don't lose anything.
It's all just a matter of time.
Interesting.
The IRS gets what they want to get.
They get paid.
When and how.
Right.
That's cool.
All right.
Wow.
Great episode, Morgan.
We went almost forty minutes
here on a lot of different things.
At times,
it probably got a little detailed
and granular,
but I think we did a great
job of explaining
really how you should
approach this from a seller
and buyer's perspective we
looked at what it is how it
works depreciation versus
amortization we looked at
one section or section is
there any other tricks tips
that you would have maybe
post close uh for buyers or
sellers to kind of end cap the episode
know if we just if we just
circle back to okay
allocation you know what
what what is that that
meeting of the minds and so
I I think you know a seller
one of the one of the
bigger challenges of the
seller is just is breaking
down the tax liability and
helping them with that with
buyers um it is it is less
consequential for them and
I think they'll soon find
once they get into
ownership they're going to
have a whole lot more to
think about than that little
You know,
four or five percent difference
that gets moved to a fifteen percent,
you know, I'm sorry,
a fifteen year amortization.
So in the in the big picture,
I think it's kind of a
short lived concern for the buyer.
And they got they have such
an amazing journey in front
of them in practice ownership,
higher income potential.
uh you know working to to
build because the practice
itself you know should be
an appreciating asset that
allows the dentist to enjoy
high income have some
control over their life and
hopefully have a nice high
quality life if they put it
all together so um I'd say
it's just it's the
allocation it's just a step
in the process as they move
into practice ownership and
it's one like you said it's
one of the last ones before
you're at the finish line
Totally.
Morgan, how do you guys help?
When do you want to be brought in?
I always give an opportunity
for you guys to just, you know,
we could put something in
below your firm and, you know,
you guys do.
We love working with doctors
that are that are our first time owners,
whether that's a startup or
a practice purchase.
We've supported hundreds of
doctors in both over the
last fifteen years.
I have always uh helped them
along the way I don't
charge for that we're we're
not in the in the
transition space we don't
we don't negotiate deals we
don't we're not we're not
involved like you are but
what we do always is if
somebody is looking to if
they're buying a practice
the time to get us involved
is I'd say at least thirty
days prior there there's no
like earlier is better um
And I'm always happy to be a
second set of eyes over the
seller financials, just to let them know,
hey, is there anything concerning?
Is it sort of within the
norms that we see every day?
And then if they do want
some help on that
allocation and they decide
we're a good fit,
I'll help them with that as
well and come to that
meeting of the minds.
And ultimately our goal is
to support our doctors and
ownership and help them with their,
it's the easy button for
their monthly accounting.
We give them that our
practice profitability analysis,
help them make sure they're
realizing that appropriate
financial reward that they
have in mind when you own a
dental practice.
And then help them, of course,
understand and plan for the
tax liabilities that are
going to be very different
for a new practice owner as
opposed to perhaps being
like a W-II associate.
So that's our world.
We love working with first-time owners.
And I would say earlier is the better.
We like to really get
involved and formalize our
relationship about a month
prior to either the close
date or the opening date.
That's about when I'm
throwing it over to a CDA.
Yeah, it's perfect.
That timing's perfect.
Yeah.
Go ahead.
Honestly,
not that we don't sometimes get
the call of, hey,
I bought a practice last week.
And well, hey,
it's still a good time to get going.
And you guys are a full
service bookkeeping, accounting,
the whole?
Yeah, that's our pro.
I mean,
we really have one program and it's
full service.
So we build the accounting
system and maintain it moving forward.
We take complete care of it.
And then we give them a full
color dashboard style
report that's written for dentists.
Dentists can actually read
and it makes sense, right?
And it gives them comparison
with our client averages.
So we're all about,
we want the dentist to
realize that appropriate profit margin
so that they have that
appropriate financial
reward that they should
they should have uh when
owning a business and I
personally you know for the
clients that we coach on an
ongoing basis after people
own you know next level has um
many clients that have went
through the buyer and
startup journey with Next Level,
but then they retained us
after close and are paired
and working with one of our
seven wonderful practice
management consultants.
I personally love your
report because I still get
pulled in kind of as a high level CFO.
And when they send me your reports,
it makes my job super easy.
And so I love those reports.
I find that they are just enough, not,
you know,
you guys are trying to be a consultant,
but you're also trying to
educate them on some basic KPIs,
which I love.
So yeah, good stuff over there.
Yeah.
Awesome.
Appreciate that.
Well,
I guess this concludes another episode.
Again, folks,
very important topic in the
purchasing a practice process.
I've never done an
allocation schedule episode before,
so here we are.
Morgan,
thank you so much for your acumen
and knowledge in the space
and what you do for our
clients and all the dentists out there.
We covered a lot of ground in
uh your time and investment
and folks thanks for
listening being a part of
the program I would ask you
to please review us give us
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And subscribe, be part of the program.
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And anyways, as always,
thanks for your time, your investment.
And I guess that concludes
another episode of Dental Unscripted.
Thanks a lot.
Thanks, Morgan.
All right.
Thank you, Michael.
Appreciate it.
Take care, buddy.
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