Top 5 Recommendations for New Vet Practice Owners

Published on: Sep 21, 2022 by Matt Vanderloo, CPA

Updated on: December 21, 2023

Is owning a vet practice in your future? You’re passionate about your career and now you are ready to create a thriving and successful practice. Choosing the right entity to create a sound financial framework and minimize taxes is the first step. Here are the top things you need to know to get started on the right path.

#1: Entity Structure

As a practicing veterinarian, it is imperative you isolate your individual liability from the liability of your practice. The way to accomplish this is through your practice’s entity designation as an LLC (Limited Liability Company). An LLC’s main goal is to shelter the owner from liability.

Here are the ways in which you can structure your LLC:

Single Owner (Single Member LLC)

Sole Proprietor: This is where the practice is not a separate tax entity. Reporting the practice’s income and expenses is done on your individual tax return, not on a separate tax return for the practice only.
S Corporation: This is a tax election that an LLC could make in which there is a separate corporation for the practice. In essence, it functions as a separate person in the eyes of the IRS. An S corporation is a flow-through entity where the practice’s income and expenses are reported to the owner on a K-1.

Multiple Owners

S Corporation: A multiple owner S corporation is treated the same as a single owner S corporation as noted above.
Partnership: A partnership is not a separate taxable entity under federal law. Income from the partnership is taxed to the individual partners on their individual tax returns.
Differences Between S Corporation and Partnership:

The owners of an S corporation receive payroll checks and pay their taxes through this holding, as opposed to quarterly estimates.
Any residual profit in an S corporation is not subject to payroll taxes. Profit from a sole proprietorship or partnership is deemed as earned income so it’s subject to self-employment tax, Social Security, and Medicare.
In the future, each entity structure will have different tax implications at the time the practice is sold.

SHOULD YOU ELECT S CORPORATION STATUS?

#2: Accounting Systems and Internal Controls

Every new vet practice owner needs to consider their accounting system. It’s essential to have it set up well because that accounting system will let you monitor, from a financial standpoint, how the practice is doing, if you bring in more money than you pay out in expenses, and ultimately it will help with your tax planning and filing.

Make sure you review the results and statements that are generated by your accounting system on a regular basis. Look at them in conjunction with reports pulled from your practice management software. Monitor what's going on in your practice, watch for trends and changes, and make sure your practice is operating the way you think it should.

Determining internal controls procedures and policies to implement is crucial in any business. Here are some recommendations that you should be sure to adopt:

Separate Duties: For example, when handling patient payments, one person should receive those payments (whether it's directly from the patient or through the mail), a different person should post the payments in your practice software, and then even someone else should be responsible for the bank deposit. This procedure will ensure the payments are posted correctly, recorded correctly, and nothing is happening to them as they’re moving through the process.
No Signature Stamp: Never use a signature stamp to sign checks. Don't make it easy for someone to put your signature on a check. As time-consuming as it might be, sign all your own checks.
Background Checks for Employees: Consider background checks for your employees to make sure you're hiring quality staff members.
Watch for Changes in Employees: One of the first big signs that something might be wrong in your practice is if one of your employees suddenly has big spending habit changes that can't be explained. Watch for any changes in your employees’ spending habits to protect your practice.
Monitor Your Credit Card Statements: Certain employees may have access to your credit cards to buy supplies so make sure all purchases are legitimately for the practice and not personal expenses.

Consider outsourcing some of the steps in your processes to protect your practice. Have your outside bookkeeper, CPA, or accountant provide assistance as an additional safeguard.

THE IMPORTANCE OF INTERNAL CONTROLS: HOW INTERNAL CONTROLS HELP REDUCE RISK, WASTE, AND ABUSE

#3: Financial Statement Presentation

Related to accounting systems in the previous section, you need to think about the financial statements you will generate on a regular basis and what kind of presentation of the information will be most beneficial to you. A typical setup for veterinary practices is to separate the financial statement into three categories:

Revenue – List four or five major areas that are generating revenue in your practice and track them over time.
Overhead Expenses – Organize by major category and again track them over time.
Compensation Available to Veterinarian – Examples include salary, benefits, residual income, etc.

It is critical to establish this correctly from the beginning so you can start getting your historical information captured in a way that will be useful going forward.

#4: Qualified Business Income (QBI) Deduction

Also known as the Section 199A deduction, QBI is a tax deduction that allows eligible self-employed and small business owners to deduct up to 20% of their qualified flow-through business income. Qualified flow-through income can come from entities such as an S corporation, partnership, or sole proprietorship, as well as rental property.

There are some limitations to QBI:

Deduction limited to 50% of wages, or 25% of wages plus 2.5% fixed asset base.
Deduction phases out for service businesses – Service businesses, as defined by the IRS, include those in the field of health, including vet practices. This means that while other businesses, such as a manufacturer, more easily qualify for this 20% deduction, those in healthcare have phase outs of this deduction based on income.

Many new vet practice owners, especially in the first year, could initially be eligible for the 20% deduction. It depends on the profitability of the practice and your overall tax situation.

THE DEFINITIVE GUIDE TO BUSINESS TAX CREDITS AND DEDUCTIONS

#5: Retirement Plan

Even though there are a variety of different retirement plan options available, the most important thing for a new veterinarian is to pick one and get started now. As a young vet and new practice owner, time is on your side so start making those contributions to a retirement plan.

The advantages of a retirement plan for your practice include:

Putting Yourself in a Position to Retire on Your Timeline – The sooner you start putting money away, the sooner it starts to compound and grow, and the sooner you can meet your retirement goals.
Attracting Employees – A retirement plan is an excellent way to attract new hires to your practice and to retain your current employees. A good plan can be a tool to hold on to those employees and make them think twice about moving to another practice where they might not receive as nice of a benefit.
Saving Taxes – If you contribute a large sum to your retirement plan each year, you also can potentially save 40% in tax on that contribution. Instead of paying it to the IRS or the Department of Revenue, you can pass some of that savings on to your staff, which is especially important in this tight labor market.

TAX-ADVANTAGED RETIREMENT PLANNING OPTIONS FOR VETERINARY PRACTICES

Bonus! - Deductible Expenses

Now that you’re a new practice owner, do you know what expenses you can deduct? Some typical deductible business expenses that relate to the practice or performance of veterinary medicine include:

Continuing education and related travel costs
Travel to meet with advisors
Cell phone (if used for the practice)
Home computer (if used for the practice)
Dues, licenses, memberships

FROM PRACTICE TO PROSPERITY: A GUIDE TO GROWING AND SELLING YOUR VETERINARY PRACTICE

SVA Certified Public Accountants’ team members have in-depth knowledge of the veterinary industry that only comes with years of experience working with practices like yours. We can help with every life stage of your practice – from start-up, through the growth phase, and eventually when you transition out of the practice. Contact us today. We are here to help.

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Biz Tip Topic Expert: Matt Vanderloo, CPA

Matt is the CEO of SVA, A Professional Services Company and a Principal with SVA Certified Public Accountants. Matt focuses on the healthcare, dental and veterinary industries. He assists individual and business clients by providing tax preparation and planning, as well as consulting and financial statement preparation.

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