Skip to main content Skip to search

Tax savings, Maximize Profits and Work-life balance

cpa in maryland

CASE STUDY 2 – Tax savings , maximize profits and work-life balance

Our Client:

John owns a small dental practice in DC. He came in to see us when his business was in the start-up phase. At that time his business was set up as a Single-Member LLC. He structured the business that way because one of his colleagues told him that was the best way to start. As a Limited Liability Company (LLC) with $600K in annual revenue, John had bookkeeping, payroll, and tax requirements – and was paying too much in DC and Federal taxes. To gauge the health of his practice, John based it on how much cash is in the business bank account. The assumption was that if he was working, then he was making money. There were no financial goals or measures for assessing whether the business was successful. Achieving financial security for his family was equally as important as his business, and wanted to use some of his business profits to fund his lifestyle and grow his family wealth.

The problems

  • John had no tax plan in place and was paying too much income taxes
  • Their existing accountant was providing only a basic tax return service and didn’t have the expertise to help them reduce their taxes or further accumulate wealth
  • John had a very long list of questions that included:
    1. Will I pay less in taxes if I structured differently?
    2. Does my wife get the business if I’m hit by a bus?
    3. What’s the best retirement tool –IRA, SEP, or 401K?
  • John’s dental practice had a great growth potential, but he was so caught up in the day to day administration and couldn’t find the time needed to focus on growing his business.
  • Other than a hunch on his bank account, John did not know what months were most profitable, the year-over-year numbers that drove his practice, when to hire staff or buy that building!
  • Due to the nature of his business, John is more susceptible to lawsuits. As a result, his business and personal assets were at risk of being taken if he was successfully sued or filed for bankruptcy due to his current business and personal ownership structures
  • At 50 years of age, John had a limited working timeframe and insufficient assets to provide him with a quality lifestyle when he retires from the workforce

The Results

When John realized that there was an opportunity to find an accounting firm that could take on key financial functions and, most important, discover ways to reduce its tax burden. Sigma Accountants was selected to replace the outgoing accountant, and the first task was to elect to file Federal tax returns as an S Corporation.  A good rule of thumb is that if you have more than $65,000 in net income, you should begin discussing the benefits of an S-Corporation with your CPA. This simple change offered several important tax benefits, notably the reduction of onerous self-employment taxes.  We helped him determine how much he should be re-investing into the business versus saving in a retirement plan. In the first year, this client worked with us his tax bill was cut by 33%. We expect similar results ongoing.

  • We conducted a detailed analysis to understand John’s business and personal goals and exactly what he wanted his business and personal assets to do for him and his family
  • We fully automated his business accounting and administration through a cloud accounting software that allows John to keep an eye on his business cash flow, create and track invoices and pay himself and funds into retirement – with the click of a button!
  • John’s S-Corp election allows him to pay himself and save self-employment taxes, fund retirement, lower his marginal tax rates and saves him 33% in taxation per year
  • By establishing a separate operating entity, if his business was successfully sued, he could wind the operating entity down and establish a new one – keeping the business asset completely protected
  • With his business and personal assets all held separately, we created a firewall between his personal and business assets to ensure that his assets would be out of reach from business or personal creditors

As the practice is growing and scaling up, we are continuously working with John on more efficient billing and better cash flow. Using LivePlan method, John is able to predict profitability 90 days in to the future with historical data in an easy to use, reportable format

Post becoming a client

Sigma Accountants handles day-to-day accounting functions, and is working with John on personal financial and lifestyle goals and track the progress of each of his asset buckets, constantly keeping an eye open for additional tax and investment opportunities available to further grow his family wealth!. We hold monthly strategy calls to discuss his business cash flow and performance, identify potential business issues before they become problems, and opportunities his business can successfully take advantage of.