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M ANY PHYSICIANS WHO established their practices more than 20 years ago are still operating as C corporations (corp). These C corps have served them well over the years, as they generally allowed for more favorable tax treatment of fringe benefits received by owner-employees, however as time has gone by the benefits of the S corp have been touted more frequently by advisors and over the last twenty years or so, more physician practices have been established as S corps than as C corps. The biggest advantage that physicians and their advisors cite for using S corps is the ability to sell the practice and have the gain on the sale taxed as a long-term capital gain as opposed to as ordinary income. Some will say there is also the double taxation issue that needs to be contended with, however practically speaking, most well advised physicians structure deals that allow them to avoid the double taxation issue. The second biggest advantage that physi- cians and their advisors cite for using S corps is the ability to minimize the Medicare taxes paid by physician owners. Because C corps are taxed at the highest corporate tax rate, almost all physician owned C corps will bonus out all profits before year-end. This means that every bit of company profit will be divvied up and added to the Form W-2 of the physician owners which subjects it to both the 2.9 percent Medicare tax and 0.9 percent Medicare surtax. If the practice is instead operating as an S corp, the owners and their advisors can establish market rate salaries for the physician owners and then all or some of the profits can be taxed to them as S corp profits, which are not subject to the Medicare tax and surtax. Every $100,000 of income that is subject to these taxes costs the owners an extra $3,800 of tax. For physicians operating their prac- tices in Ohio, the Ohio small business investor income deduction is now a third big advantage that S corps provide over C corps. This allows each physician owner to save as much $10,000 of Ohio income taxes per year by allowing a deduction of as much as 75 percent of their eligible income. Unfortunately C corp physician owner wages are not eligible small business investor income for purposes of this deduction, but S corp physician owner wages and profits are eligible income. A C corp to S corp change is fairly easy. The nice thing is that this is just a change in the way the corp is taxed, so your existing corp does not go away and it keeps the same tax identification number, which means no credentialing issues. The biggest hurdle to making this switch is something called the built-in gains tax. The immediate downside of the built-in gains tax is associated with taxing your uncollected receivables. The tax on the receivables can be eliminated through careful planning and bonuses. The long-term downside to the built-in gains tax has to do with how soon you will sell your practice. I suggest that you discuss all advantages and disadvantages of switching your C corp to an S corp with your CPA as soon as possible. The deadline for filing the Form 2553 to make the switch for the 2015 tax year is March 16, 2015. Mike Livesay is a CPA and principal of Weidrick Livesay & Company in Akron, OH. For more information, visit www.wlcpa.com or call 330-659-5985. ■ By Michael T. Livesay, CPA/PFS Maybe It's Time to Switch to an S Corp. Still Operating as a C Corp.? 2 2 | Cleveland/Akron/Canton MD NEWS ■ M D N E W S . CO M ■ JA N UA RY/ F E B R UA RY 2 0 1 5