Strategies for Individual Wealth Management:

Key Tax and Financial Considerations for Individual ASC Owners

Robert Crigler, CPA President / Chief Operating Officer Mariner Wealth Advisors, LLC

Steve Goodman, CPAManaging Director The Goodman CPA Group

Agenda

1. Tax Rates2. Phantom Income3. Tax on Sale of ASC Interests 4. Retirement Planning/Plans

o 401 k plans o Cash Balance Plans

Federal Tax Rates

2015 Income Tax Brackets The Federal income tax has 7 tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The amount of tax you owe depends on your filing status and income level. It's important to realize that moving into a higher tax bracket does not mean that all of your income will be taxed at a higher rate.

Federal Tax Rates

Individual Taxpayers

Federal Tax Rates

Married Individuals Filing Joint Returns

Additional Federal TaxesAdditional Medicare Tax on Wages, railroad retirement (RRTA) compensation, and self-employment income over certain thresholds:Employers are responsible for withholding the tax on wages and RRTA compensation in certain circumstances. Additional Medicare Tax went into effect in 2013 and applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012.

• Medicare Tax on earned income is 0.9 % on income of $250,000 (Married Filing Joint); on earnings of $200,000 (Single)

Net Investment Income Tax:

The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status

• Net investment tax of 3.8 % on income of earnings of more than $250,000 (Married Filing Joint); on earnings of more than $200,000 (Single) and generally includes income such as:

Interest,Dividends,Capital gains,Rental and royalty income, andNon-qualified annuities.

NYS Tax Rates

Married Filing Joint ReturnsIncome Marginal Tax Rate

$0+ 4.00%

$16,450+ 4.50%

$22,600+ 5.25%

$26,750+ 5.90%

$41,150+ 6.45%

$154,350+ 6.65%

$308,750+ 6.85%

$2,058,550+ 8.82%

Individual Returns

Income Marginal Tax Rate

$0+ 4.00%

$8,200+ 4.50%

$11,300+ 5.25%

$13,350+ 5.90%

$20,550+ 6.45%

$77,150+ 6.65%

$205,850+ 6.85%

$1,029,250+ 8.82%

NYC Tax Rates

Married Filing Joint Returns Individual ReturnsIncome Rate

$0 to 12,000 2.907%

$12,000 to 25,000 3.534%

$25,000 to 50,000 3.591%

$50,000 to 500,000 3.648%

$500,000 + 3.876%

Income Rate

$0 to 21,600 2.907%

$21,600 to 45,000 3.534%

$45,000 to 90,000 3.591%

$90,000 to 500,000 3.648%

$500,000 + 3.876%

Phantom Income

Partnerships, LLCs and S Corporations

Partnerships, limited liability companies (LLCs) and S corporations are all what’s known as “pass-through” entities. That means they are generally not taxed themselves, as C corporations are. Rather, their owners are taxed. Each owner receives a Form K-1 that reports his or her appropriate share of the income (or loss) even if that income is retained by the business and not distributed to the owners. You are generally obligated to report on your tax return the amount attributed to you on Form K-1. Whether you received any payout is really irrelevant to the tax question.

Phantom Income

Phantom Income is created by the following:

1. Principal Loan Payments2. Capital Lease Payments3. Working Capital Reserve4. Future Equipment Reserve5. Depreciation

Phantom IncomeReal Estate or Practice Income

Year 1 Year 2 Year 6

Cash Income from Operations

2,000,000 2,250,000 3,400,000

Principal payments on debt

(560,000) (585,000) (700,000)

Cash Available for Distributions

1,440,000 1,665,000 2,700,000

Taxable Income on K-1

2,000,000 2,250,000 3,400,000

Principal Loan & Capital Lease Payments

Phantom IncomeReal Estate or Practice Income

Year 1 Year 2 Year 6

Cash Income from Operations

2,000,000 2,250,000 3,400,000

Working Capital / Equipment Reserve

(400,000) (200,000) (200,000)

Cash Available for Distributions

1,600,000 2,050,000 3,200,000

Taxable Income on K-1

2,000,000 2,250,000 3,400,000

Working Capital Reserve & Reserve for Equipment Purchases

Phantom IncomeReal Estate or Practice Income

Year 1 Year 2 Year 6

Cash Income from Operations

2,000,000 2,250,000 3,400,000

Depreciation (400,000) (400,000) (64,000)

Taxable Income on K-1

1,600,000 1,850,000 3,336,000

Cash Available for Distributions

2,000,000 2,250,000 3,400,000

Depreciation

Assumptions: $2.5MM Leasehold Imp & $2MM Equipment purchase

Phantom IncomeReal Estate or Practice Income

Year 1 Year 2 Year 6

Cash Income from Operations

2,000,000 2,250,000 3,400,000

Principal payments on debt

(560,000) (585,000) (700,000)

Working Capital / Equipment Reserve

(400,000) (200,000) (200,000)

Cash Available for Distributions

1,040,000 1,465,000 2,500,000

Depreciation (400,000) (400,000) (64,000)

Taxable Income on K-1Phantom Income

1,600,000560,000

1,850,000385,000

3,336,000836,000

Taxable ASC InterestsPe

rce

nt (%

) Pe

rce

nt (%

)

Perc

en

t (%

) Pe

rce

nt (%

)

M inority In te res t

Single-Specialty

50

M ajority In te res t

Single-Specialty

50 50%

40 40

30

20

11%

10

26%

21% 21%

16%

5%

30 20

20%

10

10%

20%

2.0- 3.0- 3.5- 4.0- 5.0- 6.0- 4.0- 5.0- 6.0- 7.0- 2.9x 3.4x 3.9x 4.9x 5.9x 6.9x 4.9x 5.9x 6.9x 7.9x

M ulti-Specialty

50

M ulti-Specialty 50

52%

40 38% 40

30

20

10 9%

19%

5%

19%

5% 5%

30

20

10 9%

13%

22%

4%

2.0- 2.9x

3.0- 3.4x

3.5- 3.9x

4.0- 4.9x

5.0- 5.9x

6.0- 6.9x

7.0- 7.9x

4.0- 4.9x

5.0- 5.9x

6.0- 6.9x

7.0- 7.9x

8.0- higher

Multiples of EBITDA: Sale of ASC Interests 2014 Survey

Source: Healthcare Appraisers 2014 Survey

Taxable ASC InterestsMultiples of EBITDA: Sale of ASC Interests 2015 Survey

M in o rity In te res t

Single-Specialty

C o n tro llin g In teres t

Single-Specialty

50 50%

50

41% 40 40

30 30 29% 25% 24%

20 20

13% 10

6% 6% 10

6%

2.0-

2.9x

3.0-

3.4x

0%

3.5-

3.9x

4.0-

4.9x

5.0-

5.9x

6.0-

6.9x

4.0-

4.9x

5.0-

5.9x

6.0-

6.9x

7.0-

7.9x

M in o rity In te res t

Multi-Specialty

C o n tro llin g In teres t

Multi-Specialty

50 70 67%

60 40

33% 50

30 27% 40

20 20% 30

10 7% 7% 7% 11% 10 6%

0%

2.0- 3 .0- 3 .5- 4 .0- 5.0- 6.0- 7 .0-

2.9x 3.4x 3.9x 4.9x 5.9x 6.9x 7.9x

5.0-

5.9x

6.0-

6.9x

7.0-

7.9x

8.0-

higher * Does not total 100% due to rounding * D oes not to tal 100% due to rounding

Source: Healthcare Appraisers 2015 Survey

ASC Statistics

ASC Life Cycle

(4.0)

(2.0)

-

2.0

4.0

6.0

8.0

10.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Years

$ (

in m

illio

ns

)

REVENUE EBITDA

START UP GROWTH MATURE DECLINE

Source: Reed Smith LLP & HealthCare Appraisers presentation

Taxable ASC InterestsScenario 1 Scenario 2 Scenario 3

Sale Price (Redemption of Units)

500,000 500,000 500,000

Partner’s Capital Account Balance

160,000 160,000 160,000

Partner’s Outside Basis

50,000 -0- -0-

Accounts Receivable(FMV Partner’s share)

80,000 120,000 -0-

Total Gain on Sale 290,000 340,000 340,000

Capital GainOrdinary Income

210,00080,000

220,000120,000

340,000-0-

Today’s Objectives

• Gain an understanding of the basics of financial planning and how a company’s compensation and benefit programs can add to your financial well-being

• Gain an understanding of basic investing concepts and how to develop your investment plan

• Identify the actions you can to significantly enhance your financial well-being

The Value of a Financial Plan

A financial plan will help you to clarify:• Your financial goals

• Strategies to achieve the goals

• Specific steps to implement the strategies

Areas to Explore

• Saving• Managing debt• Insurance• Investing• Education funding

• Retirement funding• Pre-retirement

planning• Incapacitation

planning• Estate planning• Company stock

ownership

What Do You Want?

• Set your financial planning goals

• Each goal will have its own horizon– For the period of accumulation– For the period over which it will be spent

• Start with broad ideas and work toward increasingly specific and measurable goals

Life’s Financial Trade-Offs

23

CURRENT NECESSITIES FUTURE NECESSITIES

CURRENT EXTRAS FUTURE EXTRAS

Basic shelter, food

clothing, transportation

and medical care

Basic shelter, food

clothing, cash for emergencies

and nursing home care

L arger home, private

college, retirement travel,

bequests/charity

New kitchen, new car,

vacation, family gifts

Trade - offs

Debt Ratios

• Housing expense ratio– Housing expenses (mortgage, taxes and

insurance) should not exceed 28% of gross income

• Debt to income ratio– Total consumer debt (not including mortgage)

should be less than 20% of net income

Warning Signs of Too Much Debt

• Unable to save 10% or more of gross income• Habitually pay only the minimum monthly

payments on your credit cards• Borrowed from one lender to pay another• Unable to figure out how much you owe• Would be in immediate financial trouble if you

lost your job tomorrow

Conquering Debt

• Stop borrowing• Start using a debit card• Prioritize your debt repayment• Seek lower rates• Determine the maximum you can pay• Repay highest cost debt first• Continue paying the maximum

Key Saving and Investing Concepts

• Saving versus investing• Combining saving and investing• Saving and investing early• Tax-deferred saving and investing• Tax-deductible saving and investing• Saving and investing using employer

contributions

Investing Post-tax (Taxable)vs.

Investing Pre-tax (Non-Taxable)

Yearly Amount InvestedAfter-tax

Yearly Amount InvestedPre-tax

Investment $200,000-80,000 = 120,000 200,000

Effective Interest Rate 2.5% 5%

After 5 Years $631,123 $1,107,694

After 10 Years $1,346,186 $2,529,263

Retirement PlanningCase Study – Small Medical Practice

Source: Goldleaf Partners

Owners (2) contribution: $297,960

Employee (4) contribution: $14,568

Tax Savings: $125,011

Net cash out flow: $187,517

Retirement PlanningCase Study – Midsize Medical Practice

Owners (2) and Highly Compensated Employee (1) contribution: $273,700

Employee (8) contribution: $64,980

Tax Savings: $135,472

Net cash out flow: $203,208Source: Goldleaf Partners

Retirement PlanningCase Study – Midsize Ambulatory Surgery Center

Source: Goldleaf Partners

Retirement PlanningCase Study – Midsize Ambulatory Surgery Center

• Highly Compensated Employees (13) contribution: $2,431,750

• Employee (12) contribution: $206,986

• Tax Savings: $1,055,494

• Net cash out flow: $1,583,242

Strategies for Individual Wealth Management: Key Tax and Financial Considerations for

Individual ASC OwnersTake Away Thoughts:1. Partnerships, limited liability companies (LLCs) and S corporations are all

what’s known as “pass-through” entities and are taxed at the owners tax rate.

2. Federal tax rates are currently as high as 44.3%: i. Ordinary rate 39.6%;ii. Additional Medicare tax on earnings 0.9%;iii. Net Investment Tax 3.8%.

3. NYS tax rate is currently as high as 8.82% .4. NYC tax rate is currently as high as 3.876%.

Combined NYS/NYC highest tax rate 12.696%.

Combined Federal & NY highest tax rate 56.996%

Strategies for Individual Wealth Management: Key Tax and Financial Considerations for

Individual ASC Owners

Take Away Thoughts:5. Phantom Income is typical in most Partnerships, Limited Liability

Company’s (LLC), and S-Corporations. Prepare for the tax consequence early.

6. Consider the tax consequence on the sale of the ASC interest you hold. Capital Gain tax rates are as high as 23.8%; Ordinary rates are as high as 56.996%.

7. Evaluate your personal financial position. Can you retire when you’re ready? Are your estate goals in place? Consider talking to a financial advisor.

8. Reduce taxes by establishing a 401k Plan combined with a Cash Balance Plan for your practice, Group, or Center.

QUESTIONS

Robert Crigler, CPA President / Chief Operating OfficerMariner Wealth AdvisorsMadison, NJ(973) 984-3352robert.crigler@marinerwealthadvisors.com

Steve Goodman, CPAManaging Director The Goodman CPA GroupMarlboro, NJ(732) 750-0021sgoodman@goodmancpagroup.com

The Goodman CPA Group