Creative cash flow sources to use during the COVID-19 pandemic

By Bruce Bryen, CPA, CVA, contributing writer

May 12, 2020 -- Dental practices have been strangled financially under the hold of the COVID-19 pandemic. A lack of a cohesive plan by the U.S. government has forced states to take matters into their own hands and left individual practices to make tough decisions.

There are so many logistics to consider. Do you have the personal protective equipment (PPE) to open? How long before you run out? Will you have access to more? Should you start taking the temperatures of your employees and patients, and how do you ensure social distancing? Figuring all of this out while dealing with cash flow issues seems like an impossible feat.

In addition to new loan packages, there are options to consider.

Explore retirement account withdrawals

The dental practice retirement account can be a good source of funding for emergencies. Withdrawing money as taxable income from the account and having three years to pay the tax on the withdrawal is a way to keep your standard of living close to how it was with less revenue rolling into your practice. Loans can also be taken from retirement accounts.

Maybe it's time to sell

Bruce Bryen, CPA, CVA
Bruce Bryen, CPA, CVA.

If selling is an option, you need to start the process with a dental practice valuation. This will help determine how to price the practice. A potential buyer wants to know what the value of the practice was before the pandemic occurred. Even though all of the values are down due to the pandemic, the potential of what had been there will be helpful to a prospective buyer.

No one really understands what the value is now or what it will be shortly after dental practices reopen. The marketplace will help set the tone of pricing. Evaluators can't give opinions of values during the pandemic because the rules and policies of practices are changing almost every day. Professional organizations are counseling their dental practice evaluators to use December 31 as the cutoff date with the normal procedures for establishing the valuation amount guidelines, including those methodologies employed to determine value.

Extensive footnoting of the current value with specific caveats about support and estimating future values is not possible without a guess, which is not a standard to rely upon when in the process of preparing certified valuation analysis.

Time to get creative

It's time to think outside the box. Reducing expenses as much as possible during the virus is justified. However, don't forget about the new tax incentives that allow you to keep your office operating with personnel even as patient revenue decreases.

One approach is the reinstated "carry back loss." This is when there is a reduced amount of patient revenue and expenses remain higher than that revenue. An operating loss is the result for that year.

Under the new bailout regulations, dentists can use that loss to revisit prior years and recover some of the income taxes paid when the net income and taxes due were much higher. Consider this example: A dental practice would receive $300,000 of patient revenue that was deposited into the dental practice account, if its expenses were $500,000. Therefore, the dental practice would have an operating loss of $200,000. That $200,000 in operating loss could be used to recover federal income taxes paid on that amount in a prior year. It is important to remember that each state may have its own guidelines on what is allowable when a business has operating losses.

Other options

If the carry back loss option isn't for you, consider the low tax rate produced by the significantly lower dental practice income in 2020. Raise that reportable income by taking an in-service distribution from the retirement plan. If age isn't an issue, an additional taxable distribution may also be an option since it hopefully will be a long time before your income falls this low.

Also, it may be time to take advantage of the 20% reduction in qualified business income, which most dentists likely did not qualify for due to high incomes.

What to do

All of these options give you something to consider as you wade through these unchartered waters. During these times, it's best to consult an expert who can give you sound advice.

Dental certified public accountants (CPAs) or other financial advisers who understand the uniqueness of these times and who have the creativity to find cash sources for dentists are ready to help. Let them lead the way.

Bruce Bryen, CPA, CVA, is a certified public accountant and a certified valuation analyst with more than 45 years of experience. Learn more about him and his services.

The comments and observations expressed herein do not necessarily reflect the opinions of, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.

Copyright © 2020

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