Tips for handling the business side of medicine

August 1, 2015

n this installment of Sight Lines, J.C. Noreika, MD, MBA, talks with Michael L. Stark, JD, who has represented physicians for more than 50 years as his primary client base. Among the topics they discuss is the watershed moment that enabled physicians to incorporate and take advantage of business-tax deduction provisions.

 

Sight Lines By J.C. Noreika, MD, MBA

 

Editor’s Note: In this installment of Sight Lines, J.C. Noreika, MD, MBA, talks with Michael L. Stark, JD, who has represented physicians for more than 50 years as his primary client base. Among the topics they discuss is the watershed moment that enabled physicians to incorporate and take advantage of business-tax deduction provisions. They also touch upon the three major phases in a physician’s career.

 

Listen to the entire conversation: In this three-part track, Michael L. Stark, JD, elaborates on various salient points.

Part 1: How Stark got his start; physician career phases; concerns for inception of a medical practice

Part 2: Planning head-In event of death, disability insurance, retirement, withdrawal

Part 3: Effects of divorce, shareholder involvement, winding down a career

 

 

 

DR. NOREIKA: Please tell us how you came to represent so many physicians?

Michael L. Stark, JD: I originally was an accounting major who planned to be a CPA. In my senior year in college, I made the mistake of interning at a large, Big Eight accounting firm during the busy season: Dec. 31 to April 15. I saw they worked 14- to 18-hour days for 4 months. It did not seem like a lot of fun. So I decided to go to law school instead. It was a decision that changed my life.

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When I came out of law school, in the 1960s, I went to work for a large forward-looking law firm that encouraged me to look for any new areas of law in which we could develop a practice. I decided to look at physicians. I found that they were not a good potential market for legal services at that time because of laws that prohibited them from acting as a business. Up to that point, everybody was in a profession but not in a business. In order to get into a business, it would have been necessary for physicians to incorporate. Only about five states permitted physicians to incorporate at that time. On top of it, the Internal Revenue Service said even if you are a corporation in those five states, doctors cannot act like a corporation for tax reasons. You could not elect a fiscal year, take advantage of corporate tax structures, set up a retirement plan with tax-deductible contributions, or take deductions for expenses such as medical insurance or life insurance.

But then a group of doctors in Cleveland, Ohio, retained a large law firm to get the Internal Revenue Service’s regulations, which were called the Kintner regulations, declared unconstitutional. They took that case to the U.S. Supreme Court. About 2 months after I joined my law firm, the Supreme Court ruled that doctors could incorporate and take advantage of business tax-deduction provisions.

That was an opportunity I couldn’t pass up. I started representing physicians in forming corporations, setting up retirement plans and group insurance plans, and creating medical expense reimbursement plans. I built a practice within about 2 years that kept me completely busy for about the next 30 years.

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DR. NOREIKA: Would you say this was the watershed moment in which physicians went from their professional roots into a more business-like environment?

Next: What do doctors in their inception years most need to know?

 

Stark: There is no question about it. Until then, physicians looked upon what they did as a profession. They could not do things from a tax-advantage point of view. They did not operate as a business. But once they incorporated and started operating as a business to save on taxes, they became a business. Sometimes that’s good, sometimes that’s bad, but it certainly changed how they practice.

DR. NOREIKA: We have talked about the fact that there are three major division points in a physician’s career. There is inception (coming out of training and starting to practice), followed by the peak earning years, and then the exit or the wind up. What do doctors in their inception years most need to know?

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Stark: When the Supreme Court issued its ruling in the 1960s, medical schools did not recognize that physicians needed to know how to operate a business. So for all practical purposes, physicians starting out then, and to a great degree still, were not ready to be in the business world. One thing that I felt they needed to learn right away was that whatever they did ‒ become an employee, a partner, shareholder, whatever ‒ it needed to be in writing. Many written agreements were not flushed out the way they should be. 

Also, the most important part of the contract is not the terms going in, because things like salary and benefits are generally well thought out, but how you get out of the agreement. For example, if you have a contract to work in Akron, Ohio, but you decide you want to live in Jackson Hole, Wyoming, instead, what happens? Are there non-competition clauses if you are staying in the same area? If I can get a physician going into a contract to include those topics, then I am less uncomfortable about the rest of the contract.

Younger doctors also need to think about disability insurance because they are more likely to become disabled than they are to die or get divorced. It is more of a risk than many people think.

DR. NOREIKA: What advice do you have for physicians in their peak earning years, maybe age 40 to 55??

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Stark: These physicians need to think about how to manage their assets. Their retirement plan or a 401(k) or profit-sharing plan is likely to be the biggest asset they have. Who will help them invest that money? Who will advise them in terms of tax decisions when they withdraw that money? Physicians need advisors for investments, accounting, taxes, and legal matters. All of these are important aspects of the productive years, because that is when you have to do the most planning.

Dr. NOREIKA: We have seen physicians who have disposable incomes do some pretty crazy things with their investments. You tell a story of a local CPA who represented physicians that’s rather humorous but also has a moral to it.

Next: "I have never seen an amicable divorse"

 

Stark: I will tell you the moral first, which is that a physician has to decide if he is capable of making of his own decisions or if he needs advisors. And if he gets advice, is he going to ignore it or follow it? The third possibility is that he becomes so close to one or more of his advisors that he basically turns over all decision-making to them, which isn’t good either. This anecdote involves the last category.

So, about 20 years ago, I was representing a physician who had a local CPA handle his accounting, taxes, and investments. The doctor followed the CPA’s recommendations blindly. One of the investments the CPA came up with involved a group that was selling land in Alaska based on photographs alone. They would sell it with the promise that once the buyer owned the land, the seller would dig for gold or other minerals, which would enhance the value of the land so it could be resold at a profit. It was a scam.

Eventually the CPA was arrested and found guilty of fraud. He was sent to a federal penitentiary in Minnesota. About two years later, I got a call from that doctor. He said his CPA was doing his tax return and he needed me to send him some information. And lo and behold, he gave me the name of the same CPA and his address was in prison. The CPA was doing tax returns in prison, and not just for that doctor, but for several other doctors, too.

Dr. NOREIKA: What about the wind-up stage, what we call the going-to-the-beach stage of a career? This involves exiting a practice, probably one in which a physician has some equity. What advice do you have for this phase of their career? 

Stark: With retirement, you have plenty of time to plan, at least. The big problems are the things that you cannot plan-death, disability, or personal things such as divorce. I have had several physicians over the years go through some pretty serious divorces and as a result they ultimately did retire from the practice, almost involuntarily.

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I have never seen an amicable divorce. I often hear physicians say that they are getting a divorce but they have decided to remain friends and divide everything equitably. They think they do not need an attorney until they are ready to go before a judge. But it never happens like that. Before it is over with, they will both have attorneys. If you have had an attorney for your business for a long time, he or she has probably done work for your spouse too. If so, they cannot get involved in that divorce proceedings because they have a conflict. You will need two new attorneys.

As for death and disability, you should have insurance, but you also should have an agreement about what will happen if you step down or die. It should spell out how payments will be made or what will happen to your stock if it is in a corporation. There also are a lot of tax implications involved. What happens to your share of the retirement plan? Are you going to leave it there or have it transferred to an IRA? Do not wait until the last minute to plan these things.