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Medical Practice Profit Sharing: Top 5 Considerations for a Successful Profit-Based Compensation Arrangement

This is the first installment in a three-part series about the design and implementation of compensation arrangements in independent medical practices.

Are you considering starting a group practice or making changes to the compensation arrangements in your existing documents? In this article, we outline the top five considerations in designing a successful profit-based compensation arrangement.

  1. Fairness of agreements. When designing the profit split arrangement, it is important to determine whether the Memorandum of Understanding and various physician employment agreements are designed to match the intent of both the entity and individual physician. Consideration should be given to how the agreements will affect current and entering physicians with regard to each individual’s current and projected compensation.
  1. Allocation methods. The second consideration is how to determine allocation methods.  Once the intent is discussed, the agreements must be written in a way that discusses the allocation of a) revenues and other income, b) shared expenses, c) non-owner physician and ancillary profits/losses, and d) management compensation arrangements. The allocation of each item should be designed in a manner that will incentivize individual provider productivity, while compensating providers for management services, and allowing them to share in the revenues from ancillary services such as physical therapy departments, medical research, physician assistants, employee physicians, etc. It is important to find the balance between production-based or per-provider (shared equally) allocations to avoid producing negative correlations between productivity and each provider’s bottom-line compensation.
  1. Transparency of arrangements. It is important that all parties subject to the arrangements are privy to how individual compensation is determined, in order to maintain transparency and an equal playing field. Transparency can be obtained by providing complete profit allocation reports to owners and decision makers and excerpts of these reports to employee physicians and other parties whose compensation is profit-split based. Face-to-face meetings at least once annually are the best way to ensure that all parties have a thorough understanding of how their compensation is determined.
  1. Knowledge of healthcare-specific rules, regulations, and arrangements. It is essential to retain experienced legal and accounting counsel who specialize in healthcare to ensure your practice is compliant with Stark and Designated Health Services rules and regulations. Furthermore, your accounting counsel should have experience reading and interpreting medical practice agreements, to ensure that any profit allocations or calculations of compensation adhere to these agreements.
  1. Consideration of the future. When designing an agreement, consider how your practice might grow in the future (opening new offices, hiring additional providers, working with a new hospital or payer, etc.). Amendments are costly and time consuming, so it is important for your agreement to align with both current and foreseeable goals to the best of your ability.

REDW’s healthcare team provides timely and accurate allocations to doctors and other providers in a variety of healthcare fields. We have extensive experience working with legal teams, managers, and doctors in designing and implementing profit sharing arrangements. Please contact Cayla Anderson to discuss the profit-sharing arrangement for your practice.

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IRS Clarifies Rules for Business Meal Deductions

The Tax Cuts and Jobs Act of 2017 eliminated the deduction for business entertainment expenses. What wasn’t as clear was the fate of business meal deductions associated with that entertainment. Now, in Notice 2018-76, the IRS has weighed in with guidance that preserves business deductions for meals incurred in connection with entertainment activities—as long as the meals meet certain requirements.

This news comes as somewhat of a surprise. It had been widely speculated that deductions for meals in this context would be disallowed as part of the TCJA crackdown on entertainment expenses.

Prior to the TCJA, you could deduct 50 percent of the cost of qualified entertainment and meal expenses, as long as those expenses were properly substantiated under the strict recordkeeping rules in Internal Revenue Code (IRC) Section 274. This included meals that were directly related to your business, such as food and beverages served at a hospitality suite at a business convention, plus entertainment expenses associated with your business, like a meal preceding or following a substantial business discussion.

The deduction for food and beverages, however, was limited to costs that were not considered to be lavish or extravagant. Furthermore, the business taxpayer or an employee or other representative had to be present at the meal.

In December of 2017, congress passed the Tax Cuts and Jobs Act which eliminated the deduction for entertainment expenses. The repeal is effective for amounts paid or incurred after 2017. As a result, deductions for meals incurred in connection with entertainment activities were up in the air.

IRS Guidance Provides Clarifications

Notice 2018-76 provides some much-needed guidance. Accordingly, business taxpayers may deduct meals that meet the following requirements:

  • The expense is an ordinary and necessary business expense under IRC Section 162 that is paid or incurred during the tax year when carrying on any trade or business
  • The expense is not lavish or extravagant under the circumstances
  • The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished
  • The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact
  • Any food and beverages provided during or at an entertainment activity are purchased separately from the entertainment or the cost of the food and beverages is stated separately from the entertainment expenses on one or more bills, invoices or receipts.

Note that the IRS won’t allow taxpayers to circumvent the crackdown on entertainment deductions by inflating the amounts charged for food and beverages.

Examples

To illustrate its interpretation of the rules, the IRS provides three examples in the new Notice where taxpayers attend sports games with business contacts. It is assumed that that the food and beverage expenses are ordinary and necessary expenses under IRC Section 162 that were paid or incurred during the tax year in carrying on a trade or business and they are not lavish or extravagant under the circumstances. Also, it is assumed that the taxpayer and the business contact are not engaged in a trade or business that has any relation to the entertainment activity

  • Example #1: The taxpayer takes a business contact to a baseball game and buys hot dogs and drinks for the two of them. Although the cost of the tickets is nondeductible entertainment, the taxpayer can deduct 50 percent of the cost of the hot dogs and drinks that were purchased separately.
  • Example #2: The taxpayer takes a business contact to a basketball game in a luxury suite. During the course of the game, they have access to food and beverages, which are included in the cost of the luxury suite tickets. In the case, both the cost of the tickets and the food and beverages are treated as nondeductible entertainment.
  • Example #3: The facts are the same as in the prior example, except that the invoice for the basketball game tickets states the cost of the food and beverages separately. Therefore, the taxpayer can deduct 50% of the cost of the food and beverages, although the cost of the tickets remains nondeductible.

The IRS expects to issue proposed regulations shortly with more details on deductions for meal expenses. In the meantime, taxpayers can continue to rely on the guidance set forth in Notice 2018-76.

If you have questions on business entertainment expenses or changes to the deductibility of meals under the Tax Cuts and Jobs Act, please email Daniel Foley or call 602-730-3649.

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REDW Adds an Experienced Professional to Its Audit & Assurance Team in Albuquerque

REDW LLC is pleased to welcome Amelia Nazworth, CPA as a new Audit Manager in the firm’s Albuquerque headquarters.

A recent transplant from Anchorage, Alaska, Amelia brings a decade of experience providing business and tax planning services to clients in a wide range of industries, from medical and in-home health services to oil and gas, construction and waste management, as well as non-profit organizations. She holds a Bachelor of Science in Business with an emphasis in Accounting and a Master in Business Administration from the University of Phoenix.

For more information about the array of Audit & Assurance services provided by REDW, please contact Mike Allen at mallen@redw.com.

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REDW Welcomes Megan E. K. Clark, Further Strengthening Phoenix Tax Practice

REDW LLC is pleased to welcome Megan E. K. Clark, CPA as a new Tax Manager in the firm’s Phoenix office.

Megan brings eight years of broad tax accounting experience to the position, from preparing and managing individual, gift, estate and trust tax compliance to  S-Corp and C-Corp tax compliance for clients in the hospitality, utilities, healthcare, and real estate industries. Megan received both a Master of Accountancy and Bachelor of Accountancy with an emphasis in Taxation from Brigham Young University.

For more information about the array of Tax services provided by REDW, please contact Sandy Abalos at sabalos@redw.com.

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REDW Joins with Mack & Rohwedder to Expand Tax Consulting Practice in Arizona

REDW LLC (REDW), one of the Southwest’s 10 largest certified public accounting and business consulting firms, announced today that Phoenix-based tax and accounting firm Mack & Rohwedder, P.C. (M&R), has joined the firm effective November 1. The combined firm will operate under the REDW brand.

Steve Cogan, REDW’s Managing Principal says: “REDW’s decision to join forces is part of its strategic plan to continue to expand its tax service offerings and geographic footprint in the Arizona market.â€

Barbara Rohwedder and Claire Oddo

REDW continues to carefully evaluate opportunities for expansion by joining with highly reputable, locally owned firms that share similar values and a strong commitment to helping clients succeed in today’s business environment—M&R is that firm. As part of this merger, Barbara Rohwedder, M&R’s Managing Partner, and Claire Oddo, Senior Accountant, have joined the firm as Tax Senior Manager and Tax Senior Accountant, respectively.

Barbara Rohwedder says: “My intent was to find a firm that offered just the right combination of expertise, talent, resources, client focus, and culture. I found that in REDW, a firm that has long been respected in Arizona and all throughout the Southwest.†Barbara adds, “Ultimately, though, it is all about my clients and my team. I wanted to merge into a firm I trust will meet their needs and service expectations now and in the future. Similarly, I was looking for a firm that can provide real career opportunities for team members.â€

Sandy Abalos, Principal-in-Charge of REDW’s Phoenix office, says, “The acquisition of Barbara’s practice deepens our commitment to meeting the growing needs of our diverse client base, here in Arizona and all throughout the Southwest and beyond. Barbara’s specialty areas complement REDW’s tax offerings, including individual and business tax planning, closely held business taxation, small business accounting systems consulting, and individual taxation.â€

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Paul Madrid Dedicates Leadership to Client Relationships at REDW Stanley Financial Advisors

REDW LLC, announces that Paul Madrid has assumed the leadership role at REDW Stanley Financial Advisors, a subsidiary of REDW LLC, succeeding Ginny Stanley, who has been with the firm since 1999. Stanley is retiring as a Principal of REDW LLC.

Paul joined the firm in 2008 and assumed the practice leader role at REDW Stanley at the beginning of 2018, when he and Ginny began to work together on the transition. “I am grateful to Ginny for her mentorship, and for her past leadership in evolving our business into the respected advisory firm it is today,” he said. “My primary goal is to continue to foster the client relationships that we develop, and to work always with their success in mind.â€

“It all starts and ends with the client,†said Paul, when asked about his priorities for the next year. “We have a highly collaborative team that specializes in knowing what is important to our clients, and then designing our wealth management services to put them first.â€

“One of the ways we aim to enhance our client services is by building on our existing financial education efforts. This next year we will focus on becoming a premier financial education provider, and expanding to our Phoenix office.â€

Paul leads a team of experienced financial planning and wealth management professionals and will oversee all aspects of operations and growth strategy.

This year, REDW Stanley Financial Advisors made the Financial Times 300 Top Registered Investment Advisors for the fourth year in a row, and was also ranked by Accounting Today as 50th among the top 150 firms by assets under management. For details on these awards, please see our website at redw.com/about/news.

In addition to his leadership at REDW Stanley, Paul serves as a board member on the University of New Mexico Anderson School of Management Foundation. He is a graduate of the Leadership Albuquerque class of 2016, and is a member of Leadership New Mexico’s 2019 Core Program. He holds a B.S. in Business Administration from UNM’s Anderson School of Management, with a major in Financial Management and a minor in Economics.

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Tal Moore Honored by NNAHRA as HR Leader of the Year

Tal Moore speaks at 2018 NNAHRA Conference, where he received the award for HR Leader of the Year.

REDW LLC, one of the Southwest’s 10 largest certified public accounting and business consulting firms, is pleased to announce that Principal Tal Moore, THRP, received the National Native American Human Resources Association (NNAHRA) award for Human Resources Leader of the Year for 2018.

Tal is a long-time member and former President of NNAHRA, and has more than 25 years of senior-level experience working with tribal governments. He was presented with the award just after he shared his personal journey and vision at the NNAHRA Conference’s Celebration Lunch on Wednesday, September 26, 2018 in Phoenix.

As a principal of REDW, Tal is known for his deep expertise with tribal governments and their enterprises, especially in the areas of organizational development, strategic planning, and self-governance.

When asked about the recognition and his many years of service with NNAHRA, Tal replied, “I am honored and humbled to receive this award. NNAHRA was founded more than 20 years ago with 14 members and is now over 1,000 strong. Together, we strive to make Indian Country HR a profession of value and credibility, and I have been blessed to walk that path with so many leaders.â€

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REDW Welcomes Ali Wagner, Expands Valuation, Forensic and Litigation Practice

REDW LLC, one of the Southwest’s 10 largest certified public accounting and business consulting firms, is pleased to welcome Ali Wagner, MACCT, CFE, as an Analyst in REDW’s Albuquerque Office. Joining the firm in response to its ongoing expansion of the Valuation, Forensic and Litigation Services practice, Ali will play a significant role in serving clients.

Ali brings more than eight years of progressive experience in financial forensics, fraud investigations, and valuation-related services. She has assisted in and prepared economic damages quantifications for various litigation cases pertaining to fraud, business interruption, lost profits, and insurance claims. Ali has also worked alongside the FBI and state agencies while conducting parallel investigations on some of the largest instances of fraud in New Mexico’s recent history.

Ali holds both a BBA with a concentration in Entrepreneurial Studies and a Master of Accounting from UNM’s Anderson School of Management. She is a Certified Fraud Examiner (CFE) and member of the Association of Certified Fraud Examiners (ACFE), as well as its New Mexico chapter.

“The addition of Ali Wagner to our team is both strategic and timely,†notes Ed Street, REDW Principal and head of the Firm’s Business Valuation, Forensic and Litigation Services. “Ali’s primary role will be to help expand our services for forensics and fraud clients during a period of continuing growth. She will provide critical support and expertise in both the Albuquerque and Phoenix markets. We are fortunate to have Ali on our team.â€

“I’m excited for the opportunity to join a fast-growing and highly respected accounting and consulting firm – a firm that offers the right combination of talent, resources, and culture,†stated Ali. “I’ve had a unique experience early on in my career in the fraud and forensic accounting arena, and I’m eager to apply and expand my knowledge and expertise in the Valuation, Forensic & Litigation and Internal Audit practices at REDW. I’m also looking forward to making meaningful contributions in the lives of my fellow team members, our clients, and within our community, as well as helping propel REDW into the future.â€

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So … What’s a Blockchain?

by Laura Hall, CIMA®, AIF®, Senior Portfolio Manager/Director of Client Services, REDW Stanley Financial Advisors

From Capital Conversations (Summer 2018) – View Newsletter

Curious about blockchain? Like bitcoin, it’s a new digital technology term you may have heard bandied about recently. You may have even heard it described as a secure method for people and organizations to transact business with each other without requiring a trusted, central institution to verify the information. With a blockchain, there is no central authority, like a bank, involved in the transaction.

What does that mean?

Blockchain technology, referred to as a distributed ledger technology, is a means of executing digital transactions without involving a trusted third party. Participants in this distributed network agree upon a set of transactional records, and each maintains a copy of an immutable ledger of the transactions. It is a technology that no one can own or control, but anyone can use. A blockchain can be used for all types of valuable information, with potential application by just about any company involved in record keeping, documentation, registrations and transactions.

Say Again?

Core blockchain software lives on the internet and is available to anyone with a modem. It allows the creation of decentralized, publicly accessible digital ledgers, or sequential chains of blocks of data—hence the name blockchain. A blockchain is like a digital safe deposit box, though the security comes, not from secrecy or exclusive access, but from being tamper-proof. With a blockchain, no one is in charge because everyone is in charge. Everyone knows what is going on and it is extremely difficult to change the record. Blocks of data can be unchallengeable, so blockchains can provide a permanent audit trail.

How Does It Work?

At an elementary level without the very technical details, the basis for blockchain technology is a chronological transaction database that is shared and coordinated across a network of users. The first block is the initial transaction. Once a transaction occurs, a new block is added that contains a unique code linked to the prior transaction. New blocks are added through a process call securing. For example, if I give $20 to Claire and $35 to Michael, a block would list those transactions and contain the code that would tell all members of the blockchain that I started with $100 and had two subsequent transactions with Claire and Michael. The members of the network must validate the transactions before a block can be added to the previous block.

Each block is encrypted with a unique code, called a hash, and includes the common transaction details and unique signatures of the parties involved in the transactions. Securing occurs when the members of the blockchain compete to solve for the unique hash using software specifically designed for this. The first to confirm that a transaction is valid using the correct code is rewarded. All new blocks are linked to older blocks in chronological order, so all members of the network can see the transaction history and must approve of each new block added to the chain. Keep in mind that that every transaction, regardless of size, is transmitted to every individual ledger on the network and must be approved or validated by all members of the network.

If a member of the blockchain tries to make a fraudulent change to a completed block, all the blocks following the changed block must be changed, too. This is because all of the subsequent transactions are based on the now-changed block. The person who changed the block must then recode all the following transactions via the securing process before any new blocks can be added to the network. All of these changes take a tremendous amount of time and computing power. In addition, all the members of the blockchain would be aware that a change has been made to one of the blocks. This difficulty in changing a transaction provides a level of security to all of the network content and is the advantage and appeal of blockchain technology. It is almost impossible to locate all of the copies of the ledgers and change an entry before being discovered as a fake transaction.

There’s More?

Blockchain technology can be divided into two forms: public and private. A public blockchain means anyone who takes part in the transaction can also read and write within the entire database or network. A public ledger would be ideal for those networks where the members do not know each other, do not want to know the other members of the network, and do not want to disclose their identity. The private form of blockchain has garnered the attention of a growing number of businesses due to the privacy of transactions in the blockchain.

What are the Risks?

Although a blockchain has been described as tamperproof, it does not exist in a vacuum. There are risks not fully understood or even known about yet, as well as known risks. First, because blockchain is virtual and there is no central, trusted authority involved, it can and does appeal to those who operate outside legal guidelines. Second, the energy required for some blockchain systems is significant. Improvements to reduce energy needs are developing, but energy requirements are considerable. Third, blockchain is susceptible to the “garbage in, garbage out†syndrome. The challenge is to ensure that the information entered into a blockchain is an accurate digital reflection of what occurred in the real world. Last, information security is critical. A well designed blockchain should be secure and difficult to access, but experts do agree it may be possible to hack a blockchain.

So What’s the Appeal?

This permanent, distributed ledger, the blockchain technology, could result in more efficient processes with less chance for human error. Blockchain technology is being adopted across different industries as companies see the application of the technology to their internal processes and procedures. Companies including IBM, Walmart, Kodak, MasterCard, UPS, Lockheed Martin and Microsoft are beginning to use blockchain technology in their internal, private networks for things like managing data, cargo and shipments, as well as solving customer disputes. This technology could also have application in clinical trials, health information exchanges and combating counterfeit pharmaceuticals. Although not widely understood and utilized right now and a conundrum to many individuals, the technology does have application in very divergent industries, not only in the U.S. but also globally.

Keeping up with technology, its benefits and best uses is an ongoing challenge. As we continue to move from an economy based on producing material goods for sale to one based on the exchange of information, technology becomes more and more critical to our everyday lives. While REDW Stanley may not be able to help you with the technology challenges you may face, we can help with your financial challenges. Just ask.

Meet Jessica C. Salazar, Operations Specialist

505.998.3209 | jcsalazar@redwstanley.com

505.998.3209
jcsalazar@redwstanley.com

As the first point of contact for many of our clients, Jessica sets the standard for providing the friendly and professional service REDW Stanley is known for, along with smooth and seamless operational efficiency. Now you can match a smiling face to the name!

Did you know?

  • Firm section: We are pleased to announce that REDW Stanley has been named to the Financial Times’ Top 300 Registered Investment Advisors for 2018—and is the only New Mexico-based firm to make the list. The independent and objective selection process was scored on several factors, including independence, category of clients, assets under management and compliance record. No money was exchanged as part of the process. For more details, see our announcement at redwstanley.com.
  • Economic section: The current unemployment rate for July 2018 is 3.9%. The lowest rate reported since 1968 was 3.4% in the months of September, October, November and December 1968. Source: Bureau of Labor Statistics.
  • Client section: The next time you notice and appreciate the finely crafted wooden signs marking the entrance to a park, resort, theme park or restaurant, you may be interested to know we have a client whose business is dedicated to the fine art of designing attractive logos and crafting innovative sign solutions. They are the proud recipients of over 60 international, national and industry design awards, and celebrated their 45th anniversary last year.

© Donald Reilly

Copyright 2018 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice. 

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REDW Audit Principal Dean Willingham Honored with Construction Industry Award

Dean Willingham with the honors he and REDW received at the 2018 ASA-NM Annual Industry Awards.

Albuquerque, N.M. – August 1, 2018 – REDW LLC, one of the Southwest’s 10 largest certified public accounting and business consulting firms, is pleased to announce that Dean Willingham, CPA, CCIFP, CGMA, a Principal in the Firm’s Albuquerque office, has received the 2018 President’s Award for Outstanding Service to the Construction Industry from the American Subcontractors Association of New Mexico (ASA-NM). The ASA-NM Annual Industry Awards recognize members of the New Mexico construction industry who have demonstrated professionalism and excellence in their field. Dean also won the President’s Award in 2011.

More than 300 attendees gathered at Sandia Resort and Casino for ASA-NM’s awards ceremony as winners in 15 categories were announced. This year’s theme was “Building New Mexico—Mission Possible.†REDW also received awards for both “In Appreciation for All Your Support,†and as 1st Runner Up for Vendor of the Year.

As a principal of REDW, Dean is known for his deep expertise with construction, real estate development, government contracting, technology, and start-ups. In addition to being a Certified Public Accountant (CPA), he is both a Certified Construction Industry Financial Professional (CCIFP) and a Chartered Global Management Accountant (CGMA). Beyond his technical expertise, Dean is committed to providing value-added service that enables clients to balance risk, strengthen controls, and optimize performance.

When asked about the recognition and his many years of service with ASA-NM and the construction industry, Dean replied, “I am very humbled to receive this award from ASA. Construction has always been a great passion of mine and I continue to feel honored to participate in it with such a quality group of people.â€

About ASA-NM:

The American Subcontractors Association-New Mexico fosters, promotes, encourages and develops the best interests of subcontractors, specialty contractors and vendors for the construction industry in conjunction with construction industry partners.  As part of the American Subcontractors Association-New Mexico’s mission, it supports community organizations and helps its members to operate more efficiently.

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