Transcript YouTube English auto-captions. ======================================================================== Every physician entrepreneur I know hits the same wall at the same point. You've built something, the revenue is real, the team is real, and then you look at your tax bill and realize you're basically running a side hustle for the IRS. The frustrating part isn't paying taxes. It's that nobody on your team is actually playing offense for you. Hey everybody, welcome to Bootstrap MD. My name is Dr. Mike Buming. This is the show for physicians, entrepreneurs, and healthcare entrepreneurs. And it's a show for healthcare providers who are building something, whether it be practices, startups, side businesses, anything outside the W2. But the thing nobody tells you when you start a practice or healthcare company, is that the tax piece gets harder every year you grow. Solo W2 doctor, pretty simple. You add an escorp, add employees, maybe have a real estate holding, add some passive income. Then then suddenly your old CPA is in over their head and doesn't want to admit it. And I've had conversations where my CPA unfortunately retired early and didn't want to deal with it. I don't know if it's from me, but that's the conversation today. My guest is Spencer Carroll. Spencer Carroll is a CPA with a foot in two worlds, public accounting and tech startup sales. He's a leading accountant executive at Guilt, working directly with clients to optimize their taxes. Outside of Guelt, he's taught accounting as a professor and runs a small real estate business himself, which gives him a real owner operator perspective on tax planning. He also holds Guelt's Tax Tuck unfiltered podcast and has been quoted in Yahoo Finance and Fortune. Spencer's perspective is interesting because he's living both sides. He's a practitioner inside guilt working with high earners and he's an owner operator himself running a real estate business. So, he's not just given theory. So, quick heads up. This episode is sponsored by Guilt, and I genuinely love what they're doing for physicians, but this conversation is educational. It's not personalized advice. Of course, do your own due diligence before making any moves. So, I'd like to introduce to you the program Spencer Spencer Carroll. How are you, my friend? How are you doing today? >> I'm doing well, Dr. Mike. Thanks for having me on. I'm excited to be here. >> All right. We were just talking about the weather and and you're coming from Florida where you just it was just raining just a moment ago. >> Yeah, it was just raining. I think June 1st marks the official start of hurricane season. So rain is just going to be part of my daily life here for the next five months. >> Oh, it dries up quick. It dries up quick. All right. >> Dries quick. Yeah. And we can't complain when we've got the winters that we do. >> Perfect. So I think what was interesting about your background is you're you've been on both sides of the table. You're selling tax services as an account executive at Guelt and then you're running your own real estate business as an owner. So what do you think is the biggest disconnect between how CPAs talk about taxes and how operators are actually experiencing them? >> Yeah, it's a good question. I think you've got a knowledge gap there in the same way that CPAs can't talk medicine. Sometimes people of another profession have a hard time talking about taxes. And so I think when CPAs think about taxes, they think of it as a normal cost of doing business or making money in general. Even if you're a W2, of course, we all pay taxes. So, in the same way that an entrepreneur might think about renting their business or a software subscription like Google G Suite or Zoom, I think a lot of operators experience uh taxes less like that and more like a surprise penalty uh levied against them that they see as either being wrong or a mistake that their CPA made that they could have avoided. So, I think CPAs expect it. They think that everybody should expect it, but I think unfortunately operators get a little bit surprised come tax time. And so, you know, as a CPA myself, I probably tend to be biased towards the CPA side of things. And I think that your future tax bill can be relatively known ahead of time, and you should be able to plan for it and possibly even change your tax bill with proper tax planning and strategy. Uh, but CPAs aren't really known for being super charismatic and personable and good at communication. And so I think that's what where we're missing things is us as CPAs could do a better job of educating our clients on why they're paying the tax that they are, how their financial statements translate to their ultimate tax bill, and helping people get ahead of it and making decisions that can help impact it and reduce their tax bill. So I'd give you a couple of scenarios, and again, this is very reflective of our audience here at Bootstrap MD. You've got a solar practitioner and they're billing 400k, let's say, through an escort. You have that's one situation. Then you've got a practice owner with, let's say, three employees and they're taking home 1.5 million in revenue. So those are understandably wildly different tax conversations. So walk me through how the strategy actually shifts as a practice grows and scales. Yeah, earlier on if you're a solo practitioner and you haven't quite made it to that level or if you think you'll stay a 1099 locom tenants physician for a long time and not go into private practice, it's usually easier, more flexible and you can be more aggressive when you're a solo practitioner. And what I mean by that is we can be more aggressive on the mixed expenses. And when I think about mixed expenses, I'm thinking about those costs that are personal in nature. you probably would have paid them before becoming self-employed. So, it's just something you pay in your everyday life, but now that you are self-employed, there's a business claim to that expense and you should be able to write them off. And so, the things that I'm thinking about are like hiring your spouse, hiring your kids, writing off home office, car expenses, other forms of travel, retirement, health insurance, all that good stuff. When it's just you and it's just you working with your CPA, we can find all sorts of ways to run those costs through your business. Once you're larger and you have employees, things change and they need to be a little bit more buttoned up. You can't have the same retirement plan as you could if you were solo. You might own the real estate that your practice operates out of. I think we're going to touch on that later in this episode. And writing off mixed expenses can be trickier if you have a business partner or if you want to sell your practice in the near future. If you're a solo practitioner 1099 locom tenants, you're usually not in a position to be able to sell that service in the future. You're selling your time and your expertise. But if you do have a private practice that you want to sell, you have to really the line and balance saving taxes with aggressive write-offs while also wanting to show a very clean and healthy looking P&L that you think a buyer might want to do some due diligence on. So it changes in that way depending on how you're running your business and the size. >> Yeah, it makes sense. So, I see this a lot with my physician owners, their escope owners. It's a question about reasonable salary. And I think I've seen this debated in inner my own business circles, but we're all afraid of an audit and that IRS scrutiny is real. And people, I think, get this wrong constantly. So, what's the actual right way that we should be thinking about this reasonable salary question? >> Yeah. And this may not be the answer you're looking for, Mike, but the truth is it depends. And that's the answer to a lot of tax questions, unfortunately. But what I would tell a client who's questioning their reasonable salary is I would just say it needs to be defensible. So, what you need to be thinking about is if the IRS came knocking on your door and asked you to prove why you should be paid what you're paying yourself, you need to be able to support with documentation why you made that decision. There's technically no black and white definition as to what reasonable means in the eyes of the IRS, but like I said, they might ask you about it and you've got to provide documentation for your decision-m. It doesn't necessarily have to be as high as you might think for a physician in the same specialty as you if they were being paid a normal W2 salary because as a business owner you do a lot more than just being the physician and providing your medical expertise. You'll do payroll, possibly bookkeeping, invoicing, accounts payable, manage the tax filing process. So all those are different tasks that business owners take on and you can associate how much you pay yourself based on the amount of time that you spend on non-medical services right or tasks I guess I should say within your business and really I've seen a lot of low physician salaries in their escorp and they haven't been audited now just because they haven't been audited yet doesn't mean that they won't be in the future and the government is usually pretty slow at adopting new technology, but I do believe that they'll eventually catch on to AI and your W2 salary is just a number on your 1120s and it would be very easy to just automate the detection of that and compare it to your gross revenue, your net profit. >> And so I do think that this could see an uptick in the future. So it's important that you spend a little time thinking about it and documenting it properly. >> Yeah. And and of course we work with name of my business is Bootstrap and when I first got started I didn't I wasn't making a lot of a salary if at all and that's very common for startups for any type of a startup on there but if it's 10 20 years out and you're still making that same salary you might have a little bit of eyes that are looking at to what you're actually doing. >> Yeah. And if you start with it being a side business so you keep your W2 job and you start doing some moonlighting on the side. The escorp is the instyle entity structure these days. You can see a lot you can find a lot of hype about an escorp on the internet and it absolutely is a great structure in the right circumstance but it's not always the best structure and so in the early days it may not make sense to go elect right away and so then you don't have to worry about the reasonable salary at all. Got it. Gotcha. as opposed to just you know practice. We have healthcare founders who are building startups and they often have a totally different tax profile than a practice owner. So things like equity, deferred comp, QPS, capital gains treatment. So what should a physician founder know going in that mean maybe they're not aware of? >> Yeah, I think I see a lot of founder physicians, they're not aware the tax code is full of tradeoffs. Uh, it's very cleverly designed. They had a lot of smart people decide entity structures, how they're taxed, how your income gets treated, and you're not meant to be able to double dip. And what I mean by that is for solo practitioners and private practice owners, they're usually going to be LLC's, right? And those offer a lot of yeartoyear tax strategies. So, there's different things that you can write off, move money in certain ways every single year to impact your ultimate tax bill write-offs like we've talked about earlier, but LLC's when you go to sell the business, they don't provide a lot of great benefits when you go through the M&A process. On the flip side, >> if you're a founder, you're typically setting up a Ccorporation. Delaware Ccorporations are the most popular and you're going after venture capital funding and eventually you want exits. You want secondary market exits or you want the big IPO exit. For founders there, your year-to-year strategy is very limited. You're actually going to look a lot like a W2 physician because officers of CC corps are paid as W2 employees. So, yes, you'll have equity comp, but equity comp, I like to joke, is fake money until it's not. And when it's not, it's really great, but until an exit happens, it's just numbers on a cap table. So, really, your year-to-year income is a W2 salary. But when you do have that exit, you get QPS, which you mentioned, qualified small business stock treatment. And that's probably the number one tax deal in all of America. When you have QSBS, you can have 10 plus million dollars of capital gains completely tax-free. So, there's pros and cons to everything. You're going to give up tax efficiency in the year toyear for the hope of a amazing tax efficient exit. Or you could go the LLC route and you're going to have tax efficiency yeartoyear. But if you ever go to sell it there, it's limited in what you can do. >> Yeah. And I've heard this before. Hey, and I tell my audience, hey, think big for sure. But yeah, often times I've had that conversation like, oh, maybe that COP, the Delaware, maybe that's the way you want to go. But that's for special. That's for certain folks. That's for certain doctors. Again, it doesn't happen often. If you think you have something that you can scale and grow and more power to you, yeah, >> it's good to plan ahead. Then it's hard to do it afterwards, right? >> It is hard to do it afterwards. It can be tricky to change your entity structure. It also depends on how you plan to run the business. So, another reason that a lot of people go with the CC Corp route is if they're going to go seek outside capital. I don't know if private practice physicians really think about bootstrapping, but in the founder world, they would be considered bootstrapping, which means that you're paying to start up the medical practice, and it's the profits of the business that's going to keep it growing and moving forward. founders are usually going after other people's money. And when you do that, the way that an escorp is designed legally, you can only have a hundred shareholders. And so, usually a startup that has hundreds, if not thousands of employees, plus venture capital funds that are also owning a piece of the equity as well, it would be literally impossible from a legal standpoint for them to be escorps. So it depends on how you want to grow your business too, not just the tax efficiency that goes into that decision. >> So you spoke earlier about paying for family members to work in your business. So hiring your spouse, hiring your kids, and I've seen this come up constantly for practice owners, whether the spouse is you got the doctor and then the spouse maybe is the office manager. >> Yeah. But where's the line between a legitimate strategy and something that is sending bright lights? This is going to be an audit. >> Yeah, this comes up often and I like to instruct the client to do a fun exercise and put yourself in the shoes of an auditor and if it was your job to make sure that people were taking legitimate business deductions, would you buy the story that you're trying to sell? And so when you're thinking about these tax strategies, hiring family members, does that family member provide legitimate value to the business and for a reasonable compensation? So once again, we're back to reasonable comp and the IRS does care about that. So it's tough for physicians because you're usually working from a medical facility. your family is not present when you're providing your services, of course, and you the service that you provide is the your medical expertise and skills. So, it's not quite as straightforward as a realtor or a media professional who can easily incorporate their family into the business, but it doesn't mean it's impossible. We just need to find something that they can actually do and that we're paying them fairly for that. So, I was talking to a physician just a couple weeks ago. They told me that their child had just recently graduated from college. They were back home. They haven't found a job yet. And this physician is a 1099 anesthesiologist. And she wanted to figure out a way to pay her child. Her daughter had just graduated from business school. She has experience with QuickBooks. She can handle the accounting, the bookkeeping for her mom and her mom's business. And that's great. And we can pay a daughter to do that work for the mom. It just needs to be reasonable. So, we can't pay the daughter $35,000 for two hours of bookkeeping work every month, but it is a legitimate strategy. It's legitimate value that the daughter's providing. We need to document it properly and then we need to pay her properly. So, it is doable, but it can be tricky. And again, you just need to think if I was on the other side of the table asking me these questions, would I be picking up what I'm putting down? So, for the tax purposes, because now she's an adult, is there is there anything different than whether she's related or not? >> So, that's a good question. The strategy still works. It's just maybe in a different way. So, the idea of a lot of tax strategies, if not all of them, is we don't want you just spending money for the sake of saving money on your taxes because you're always going to save pennies on the dollar, right? An easy example of that is don't just go buy a G Wagon to ride it off through your business if you don't really need a new car because you're gonna spend 120,000 for that car and it's going to save you 50,000 on your taxes, right? That's not a great deal. We don't you're still out the cash. >> Yeah. >> And so when it comes to paying your children, the question that I ask clients is, are you still financially supporting the child? If you're not financially supporting the child, then it's not really a great strategy. If anything, you're playing kind of a tax bracket margin game and hoping that you kind of share family finances, which is very rare and would be somewhat unusual. But in this case for this physician that I'm talking about, her daughter had graduated but hadn't started working, was living at home, and so the mom was still paying for her bills. And so the idea there is you're spending the money anyways. And those are the strategies that we like to take advantage of. If you're going to spend the money anyways, why spend it from your personal account and get no tax benefits for it? If there is something legitimate that your daughter can do for your business, if you spent the money through the business, you're getting a 37% tax deduction by flowing it through as an expense. So, when it's a younger child, it can be very obvious because of course you're financially supporting your 14-year-old and if you pay the 14-year-old $15,000 per year to do a service for you, that's the standard deduction, give or take. And so then that 14-year-old will pay zero tax and you'll get the tax deduction for the expense. But even if your kid is making some earned income but just not enough to fully support themselves and so you're having to fill in the gaps, that child of yours is probably in the 10 12% tax bracket and you're in the 37% tax bracket. Still might as well support your child by running it through the business. And yeah, the child is going to have to pay taxes on it, but it's at such a low rate it shouldn't be a big deal. Yeah. I think the kids call it the math should be mathing, right? >> Yeah. Yeah. The math has to math. You don't want you just spending money to spend money, but if it's going to happen anyways, then the math maths. Gotcha. Gotcha. All righty. So, I know about your background in real estate. And a lot of my listeners buy real estate. Oftentimes, it's where their practice is. So, real estate in their own business. They're perhaps they're buying their own office building or they want to. They're putting it into a holding company and they're leasing it back to the practice of talk about math. When does that math actually work and when are physicians being sold a strategy perhaps that they don't need yet? >> Yeah. So, I think physicians get sold a strategy that they don't need yet. Sometimes, not all the time, of course, but sometimes when it's not the building that they're operating out of. If you're operating out of the building that you're buying, that is usually a great tax strategy. I'll give you one reason why it maybe wouldn't, but most of the time, uh, if you can afford it and it's an option for you, buying the building is great because it opens up what's called the grouping election. And so, real estate is normally considered a passive investment. And so that's why it's usually oversold is if you just go buy a rental property, an apartment building, it's passive and even if you're able to generate losses, which is the whole point of getting into real estate is it's good at creating losses through depreciation. You can't use the losses against your W2 or your private practice or your escorp income because it's passive and that income is considered active and they don't mix. But when you do the grouping election, you're basically saying, I want the entire activity, my medical practice and the real estate that it operates out of to be one economic unit. And so then it all blends together. And if you can create losses from the real estate, the losses can offset the income from the practice. when it may not make sense, piggybacking off of our last uh question and answer, Mike, it's when the tail could be wagging the dog, which is by and large, real estate is a great investment. That's why it's so popular. So many people get into it, whether it's their own the building that they're operating out of, or just another real estate investment. And if that's the case for your practice, then great, you should do it. But if you want to sell your practice soon, meaning you're not going to be in the building for very long, if you're going to move to a different location or the real estate market where you're located is kind of stagnant or in decline, the sense on the dollar tax savings that you're going to get from the depreciation losses may not be what you want if you're going to get stuck with a hassle and a headache when you're done with it or want to move. uh because at the end of the day it is still an asset that eventually you would want to exit from that asset and so you have to think about that in the future. Now a number of my listeners also are involved in tele medicine. I have doctors. They're actually looking to start multi-state practices. You got tele health across state lines. They work with remote employees both here and abroad. And the tax complexity I think has exploded. Not only is this area exploded but the tax complexity has exploded as well in the last few years. So what is your advice for those folks? because it seems like it's almost becoming a full-time job just having to deal with all the tax issues. >> Yeah, it's a full-time job and it's usually a surprise, too. I find that when people get into teleaalth, hiring a remote employee, they don't realize that comes with extra tax complexity. So, then they go talk to their CPA, they find out now they have to file in five states. Their CPA's cost just went up because they have to file in five states and everybody's unhappy, right? Uh, so my advice would be one, usually a good idea to do some research before you take these steps. So if you're thinking about doing this stuff, you should just ask AI or Google how this could impact your taxes if you go this route. But then my second piece of advice would be to outsource it. Then go to medical school and do all these years of training to also be a a payroll processor, a bookkeeper, a tax CPA. So outsource it. You can use an employer of record which is actually one service that acts as the legal employer of your employees. So they are the ones that handle the local and state compliance that comes with it and then use a third party payroll provider, hire a bookkeeper, find a great CPA, and if you can put that team together, then you can still expand and do those things without creating this full-time job. >> Makes perfect sense here. So let's talk about another area that has been a lot of interest in and obviously is an exit strategy or exit planning. So a physician practice owner maybe they might sell to a private equity back group and in five years they should be thinking about the tax moves today not in 5 years from now. So but what are those moves and why do you think and I'm assuming most owners aren't actually making them right now. Yeah, they're not making them right now. And I am somewhat understanding of that actually because some of the moves you don't know in until it's kind of like how do you plan a vacation before you know where you want to go, what the destination is going to be. And these structures can be complex. They're costly to set up. And if you don't know the details of the transaction, how do you plan for it? And so what I mean by the details is was it going to be an equity sale or is it going to be an asset sale? Those are taxed differently. And so your planning and strategy might be different. Are you going to get a lump sum payout? Is it going to be installment sale over many years? Are you going to stay on as an employee and receive an earnout? Different performance metrics that come along with it. All those things can mean different tax decisions. And so if you don't know what's going to happen, it can be hard to plan. And so I I give a little bit of grace there. But when that time does come, the common move would be setting up a trust structure that allows you to smooth out the income that you receive and the tax bill over multiple years instead of just getting this big windfall of millions of dollars where you might end up having to pay 23% capital gains plus whatever the state you live in might have something on top of that. You can spread out the tax hit by putting it into a trust first and then the trust pays you out over time. That would take an estate or an M&A attorney to set that up. And so that that could be hard for a business owner to set up proactively until they have some sort of timeline to sell the business. But I do tell clients definitely don't come to us after you sold the business. Don't come to us two months before the closing date. If you think it's going to happen in 2027, now is probably the time to start having those conversations. >> Yeah. Yeah. No time than the present to start thinking about that now. >> Now, the next question is something is a question that I often get asked and sometimes they use this term interchangeably and that is financial advisor because I've seen so many people who claim to be a financial advisor. So, I want to understand if you could build out a team for us. You're the practice owner. You got a CPA, a bookkeeper, someone's is a financial adviser and maybe even speculate what that actually means, an attorney. So, who owns what? So, where do the responsibilities overlap? And where do physician owners usually have a gap that they don't even realize that they have? >> Yeah, I think the gap is you're looking for someone who can do all of these things. you're trying to find that one solution, but usually that person is going to be a mile wide and an inch deep or jack of all trades, master of none. And so, not to say that I haven't seen it. I've talked to people that have a partner that does multiple of these concentrations and they're very happy with them and they think they do a good job, but they are different. There might be some overlap, but they are different. And so what I tell a client, if you're thinking about a financial adviser or a CPA, I think in its purest form, a financial advisor is thinking about your future goals. When do you want to retire? What lifestyle do you want to live when you retire? Can you afford the new home? Can you afford a boat? Can you go to Europe this summer? Can the kids go to private school? A CPA is not necessarily wanting to or going to answer those questions. Uh we don't it's not that we don't care about the ROI of your investments or your net worth growing over time. It's just that we're focused on helping you keep what you earn. A financial advisor is trying to help you earn more, right? And so those are different concentrations. And with physicians, you could even draw a parallel with legal as well. There are some states where a physician can't have just a plain old LLC or a plain old corporation. They have to have a professional LLC, a PLLC or a professional corporation because they can't provide medical services if it's not a professional corporation with a licensed professional as the owner of that corporation. Now, how the IRS treats an LLC versus a PLLC is exactly the same. The IRS doesn't really care that it's a PLLC. So, a CPA in a sense also doesn't really care because we care about how you're taxed. So, my personal opinion is it's good to find an expert in each concentration because they're going to provide a level of depth that you're not going to find if somebody is trying to figure out your bookkeeping, how to file your taxes, and oh, should I put this money into Nvidia or Amazon this month? It's hard to be an expert in all of those things. >> Yeah. Just like in medicine, you want to have the specialist working on your condition. If you got that condition, you want to see the specialist, not necessarily jack of all trades. So, this has been amazing. I last one question for you because I know you got to go. Practice owners who treat their business as a real business versus those who treat it as a glorified job. What is the tax mindset shift that separates those two groups? >> Yeah. So, like you said, there's people who treat their business like a real business versus just creating a new job for them. I would like to see business owners see their business as a living organism outside of yourself. And this thing that you've created outside of yourself is making you money. I think too many self-employed physicians, self-employed people in general, they stop their W2 job, but they still act like their W2 employees. And what I mean by that is all of their income goes into the same place. all of their money out comes out of the same place. And so there's no identification of what is me the individual and what is the business. And until you start treating it separately and providing good accurate data as to what is this living thing bringing in as revenue and what is it spitting out as legitimate business expenses. If a CPA can't get good data like that, then we can't provide you with a good tax strategy. It's just a jumbled mess, we don't know what's going on. How can we tell you how much you can contribute to your solo 401k if nobody knows what your net profit is? You're either going to put in too little and then you're going to miss out on tax savings and retirement savings or you're going to put in too much and now you've created this huge headache where you have to claw it out. You've got to file paperwork. You might have penalties. So, garbage in, garbage out. We want you to keep it separate. Keep it organized. Provide us with good data. That's the mindset shift between I'm working a job and I'm a business owner. >> Yep. I'm data driven, but if you have bad data, you can't move forward on that. This has been amazing. I really appreciate you keeping it practical. So everybody who's listening to this, if any of this resonated with you, I advise you to share this episode with one physician founder or practice owner, that's how the show grows and that's how this conversation reaches the people who need it. So guilt is at joingelt.com. That's j o i n gt.com. We'll put the links here in the show notes. if you're a practice owner, entrepreneur, healthcare founder, and any of this hits home. So that's your sign to at least have the conversation. Spencer, thank you so much for joining us. Any last minute thoughts or point you want to make before we end the call today? >> No, I think this has been good. Mike, and we've covered a lot of great topics. So yeah, if this resonated with you, come check us out. Like Mike said, you could also email me, Spencer, my first name at joingelt.com, and we could have a personal conversation. I'd be happy to. But this was a lot of fun, Mike. Thanks for having me on. >> All right. This has been great. Thanks, guys. Thank you, Spencer, for joining us. And thank you for listening. Again, as an entrepreneur, you're going to have your ups and your down. Do something a little each day to get you closer to your goals and keep moving forward.