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BE IN A POSITION OF STRENGTH
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CUSTOM SOLUTIONS TO PUT YOUR ORGANIZATION IN A POSITION OF STRENGTH
BE IN A POSITION
OF STRENGTH SM
SURGICAL CENTERS FINANCE TRENDS AND UPDATES
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DISCUSSION TOPICS
Hospital acquisition of Ambulatory Surgery Centers (ASCs)
Preferred ASC Entity type
Non-resident Owner Issues
Owner income: Passive vs. Active Tax Implications
NJ Department of Labor Audits
Sales/Use Tax Filing Requirements
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HOSPITAL ACQUISITION OF ASCs
More than 5,300 Medicare Certified (MC) ASCs nationwide; • NJ has 247 (MC) ASCs (330 total);
• PA has 241 (MC) ASCs (Philly metro area has approximately 30) (271 total);
• CT has 45 (MC) ASCs;
• RI has 13 (MC) ASCs.
NJ instituted a ban on new surgical center formation in September 2009. New ASCs are allowed with partial ownership by a Hospital.
Based on 2011 ASCA analysis of Centers for Medicare &
Medicaid Services 2011 data.
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HOSPITAL ACQUISITION OF ASCs
Factors affecting the value of an ASC are earnings, growth potential,
assets, location, and reputation.
Consideration is also given to the facility's replacement cost as well as the
market value of other ASCs. The fair market value of an ASC will
typically range from three to seven times the historical earnings before
interest, depreciation, taxes, and amortization (EBIDTA). There is also
consideration for the number of specialties.
For single-specialty centers, the multiple is typically three to five times
EBIDTA.
For multi-specialty centers, the multiple typically ranges from five to
seven times EBIDTA.
HOW TO DETERMINE VALUE
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HOSPITAL ACQUISITIONS OF ASCs
To obtain a Physician referral base or specialty
To capture additional market share
To outsource overflow of surgical cases
To control flow of surgical cases to the hospital
REASONS FOR ACQUISITION BY HOSPITALS
REASONS FOR SALE TO HOSPITALS
Gain increased fee reimbursements
Ability to go in-network
Access to additional physicians/referrals
To outsource overflow of surgical cases
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PREFERRED ASC ENTITY TYPE
Option 1: Limited Liability Company (LLC) treated as a Partnership for
tax compliance purposes. Considered a “flow through entity.”
Owner income and business activity amounts are taxed on the owner’s
personal tax return.
PREFERRED OPTION
Option 2: Corporation electing “S” status, called an S Corporation.
Also considered a “flow through entity”.
Option 3: Corporation, called a “C Corporation.” All income is taxed at
the entity level. Distributions are taxed a second time at the individual
owner level.
OPTIONS:
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PREFERRED ASC ENTITY TYPE
Option 1: Limited Liability Company (LLC) Pros:
ease of formation;
ease of ownership transfer;
ease of termination;
desirable for acquisition by not-for profit Hospital;
considered a flow through activity for taxation;
liquidation of LLC assets, generally tax free;
offers liability protection for all members;
allows for multiple classes of ownership;
allows for multiple types of owners
Cons:
must have 2 or more owners (Partnership format);
LLC (Partnership format) may be prohibited in certain States;
some states do not tax Partnerships but do tax LLCs filing as a Partnership
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PREFERRED ASC ENTITY TYPE
Option 2: S Corporation
Pros:
ease of formation;
ease of ownership transfer;
considered a flow through activity for taxation;
one owner allowed to keep “S Corp” status
Cons:
typically not considered for acquisition by Not-for Profit Hospital;
limited number and type of owners;
one class of stock allowed;
liquidation of assets considered taxable at FMV;
formal process for termination
Option 3: C Corporation
Pros:
offers liability protection for all members;
multiple classes of stock allowed
Cons:
typically not considered for acquisition by Not-for Profit Hospital;
Income and distributions are subject to double tax at both Corporate level(on income)and individual level(on distributions)
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NON-RESIDENT OWNER ISSUES
1. Non-resident withholding on income Consideration must be given to the withholding amount prior to making
distributions.
2. Non-resident owner state entity return requirement States where non-resident owners reside require filing of entity tax return
OWNERS NOT RESIDING IN THE SAME STATE AS THE ASC
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NON-RESIDENT OWNER ISSUES
Non-Resident Withholding on Income
Resident Owner Non-resident Owner
Net Income from ASC
(per owner)
$250,000 $250,000
Cash Available for
distributions
(per owner)
$200,000 $200,000
Withholding amount
for non-resident (9%)
$ -0- $ 22,500
Distribution to owner $200,000 $177,500
Assumptions:
1. All amounts are per owner respectively;
2. Income from ASC is taxable k-1 reported income;
3. Cash available for distributions is after consideration for operating cash reserve, debt service, and depreciation;
4. Assumes highest State tax rate is 9% and calculated on income amount.
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OWNER INCOME: PASSIVE VS. ACTIVE
Passive Activity Net investment income generally includes income and gain from passive activities. A passive activity includes any trade or business in which you do not materially participate.
Material (Active) Participation The trade or business is a personal service activity in which you materially
participated for any 3 (whether or not consecutive) preceding tax years.
A trade or business is a personal service activity if it involves the
performance of personal services in the fields of health (including
veterinary services), law, engineering, architecture, accounting, actuarial
science, performing arts, consulting, or any other trade or business in
which capital is not a material income-producing factor.
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OWNER INCOME: PASSIVE VS. ACTIVE
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OWNER INCOME: PASSIVE VS. ACTIVE
SINGLE-ROOM
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OWNER INCOME: PASSIVE VS. ACTIVE
Passive Income Active Income
Taxable Income reported on K-1
form $250,000 $250,000
Federal Income Tax
(39.6%) $99,000 $99,000
Net Investment
Income Tax
(3.8%)
$9,500 0
Self-employment tax
(2.9%) 0 $7, 250
Total Federal Taxes $108,500 $106,250
Net Income after taxes $141,500 $143,750
Assumptions:
1. All amounts are per owner respectively;
2. Income from ASC is net taxable K-1 reported income;
3. Tax rate assumes highest Federal rate at 39.6%;
4. Assumes taxpayer is over Social Security tax limit, only subject to Medicare tax @1.45%
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DEPARTMENT OF LABOR AUDITS
DEPARTMENT OF LABOR (DOL)
What triggers a DOL audit? Many factors can expose your organization to selection for a DOL
audit:
• Reporting issues such as:
o failure to file;
o late filings;
o obvious errors or discrepancies.
• A disgruntled employee filing a complaint or grievance.
• Random audits are possible as well.
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DEPARTMENT OF LABOR AUDITS
DEPARTMENT OF LABOR (DOL)
What can you expect? You will most likely be informed of the audit by letter from the DOL.
They will inform you of your rights as a taxpayer and indicate that
you can be represented by a professional if desired.
Once you contact them and acknowledge receipt of the audit
notice, they will provide you with a document request list.
The DOL auditor will make an appointment to visit your site, to
review the requested information, document any additional
information needed and discuss potential findings.
Once the audit is complete, a final report is issued with any assessed
taxes, penalties and interest.
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DEPARTMENT OF LABOR AUDITS
What should you do when you receive a notice of audit?
First, contact your CPA or bookkeeper. Determine whether it’s
necessary to assign them Power of Attorney (POA) to act on your
behalf.
Whether assigning someone to act on your behalf or not, you should
keep an inventory of the items provided to the auditor and have the
auditor acknowledge receipt of any documents.
Remember, the DOL will always act in the best interest of the
employees not the employer.
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DEPARTMENT OF LABOR AUDITS
Common Audit Findings
1. Wage & hour issues (i.e: overtime pay):
Employers should evaluate their practices to ensure they are not
misclassifying employees as exempt from overtime.
An individual employed in a bona fide executive, administrative,
professional or outside sales capacity is typically exempt from
overtime requirements.
Overtime pay is 1 ½ times the employee’s regular hourly wage for
each hour of working time in excess of 40 hours in any week.
Hours should not be averaged over two or more workweeks. As an
employer, you are required to total each employee’s time for a
seven day work week, even if paid every 2 weeks.
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DEPARTMENT OF LABOR AUDITS
Common Audit Findings (con’t)
2. Independent contractor vs. employee issues:
Three part test to determine if a worker is a independent contractor:
I. The individual has and will continue to be free from control or direction
over the performance of the work except within contract parameters. The
contract must have a defined limited term;
II. The work is outside the usual course of the employer’s business or not
performed at any of the employer’s places of business;
III. Worker is customarily engaged in an independently, established trade,
occupation, profession, or business. Proof is typically requested by the
auditor from a sub-contractor. Proof can be a business card,
advertisement, list of active or recent clients/customers, or business liability
coverage.
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DEPARTMENT OF LABOR AUDITS
Common Audit Findings (con’t)
Example of a significant adverse audit finding as a result of an
employee complaint about a hostile work environment.
Details: I. Employees were expected to use a time clock when starting work;
II. The employer provided newspapers, coffee, and breakfast rolls each
morning 30 minutes prior to starting work;
III. Overtime was allowed only if approved by the Director of Nursing or the
Administrator and was monitored closely to keep payroll costs to a strict
budget.
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DEPARTMENT OF LABOR AUDITS
Common Audit Findings (con’t)
Example of a significant adverse audit finding as a result of an
employee complaint about a hostile work environment.
Audit findings: I. After review of the payroll time cards, the auditor found the employer was
not totaling each week to calculate overtime whether any was earned or
not;
II. The employees were clocking in when they arrived at the Center upto 30
minutes prior to starting work;
III. The employer was missing several years of time records and could not
support when employees were clocking in or any calculation of overtime.
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DEPARTMENT OF LABOR AUDITS
Common Audit Findings (con’t)
Example of a significant adverse audit finding as a result of an
employee complaint about a hostile work environment.
Audit results: I. The employer was fined for not totaling employee records on a weekly
basis;
II. The employer was required to pay every employee back-pay for any time
each day if clocked in before the official start of work. The DOL assessed
back-pay to all employees retroactive for 7 years. The period of time
beginning when the disgruntled employee was hired;
III. The employer was fined for not maintaining payroll records indefinitely.
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DEPARTMENT OF LABOR AUDITS
Records to maintain:
All payroll records. Retain indefinitely;
I. Weekly time records, totaled by week;
II. Quarterly and annual payroll reports;
III. Employee contracts (proof of salary amount and raises);
IV. W-4 forms (proof of social security numbers and withholding
information)
All sub-contractor records. Retain indefinitely;
I. Contracts (proof of contract terms);
II. W-9 form (proof of ID number)
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SALES & USE TAX ISSUES
SALES TAX: Taxable goods and services (typical sample):
service maintenance & repair contracts (taxable CT, NJ, & NY)
(Exempt from tax PA & RI);
medical supplies (taxable NJ, NY, RI) (Exempt from tax CT & PA);
computer equipment.
USE TAX: A use tax is imposed when taxable goods and services are
purchased and the state purchaser’s sales tax is either not collected
or is collected at a rate less than the state purchaser’s sales tax rate.
The use tax is due when such goods, or the goods on which taxable
services are performed, come into the purchaser’s state. If sales tax
was paid to another state, the use tax is only due if the tax was paid at a rate less than the state purchaser’s rate.
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SALES & USE TAX ISSUES
State Sales/Use Tax rates
CT 6.35%
NJ 7%
NY around 8% varies by location
PA 6%
RI 7%
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SALES & USE TAX ISSUES
Add additional facts here
State Filing requirements: Deposits
How to file & Frequency of reporting
CT Monthly when total liability is > $4,000 Annual if total < $1,000
Filed electronically Quarterly report
NJ Monthly deposits if annual liability is > $30,000
Quarterly deposits if total liability is < $30,000
Filed electronically Quarterly report
NY Monthly deposits if prior quarter’s receipts are > $300,000 Annual if total liability is < $3,000
Filed electronically Quarterly report
PA Monthly when 3rd quarter liability is > $300
Semi-annual if total liability < $300
Paper file Quarterly or semi-annual report
RI Quarterly if previous 6 months liability is < $200 Monthly if previous 6 months liability is > $200
Paper file
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THANK YOU!
Rob Crigler, CPA
Morristown, NJ office
[email protected] (973) 898-9494
Barry Shapiro, CPA
Red Bank, NJ office
[email protected] (732) 842-3113
Jennifer Safeer, CPA
Toms River, NJ office
[email protected] (732) 504-2400