Transition Innovations from Retirement Planning

Lack of staff turnover is an important attribute for developing goodwill, ensuring the longevity of the operations for the shareholders (as well as for any potential buyer of the laboratory), and creating continuity of business. Using such a deferred compensation plan, these loyal employees should see significant amounts of money waiting for them at retirement. These assets accrue income in the laboratory's own 401(k), a profit-sharing plan, or possibly a SIMPLE IRA while the employees are working and increasing their tenure and roles with the laboratory. These are the common kinds of retirement plans that accumulate wealth for employees and owners. Those who work hard and have been with the organization for a long time will have a sum that is protected from creditors, available for them in the qualified employer-sponsored retirement plan. Their input and recognition will empower the laboratory to increase its value and productivity.

When the time comes for the shareholders or partners to sell the organization, there are some strategies for retirement plans that allow thinking outside the box. Additional amounts of money invested into existing or new retirement plans are available with some innovative thought processes.

During a typical transition after the sale of a laboratory, a buyer will want to write off as much of the purchase price as possible by allocating a considerable amount of the sale price to the equipment. This is an excellent approach for a buyer but probably creates an adverse consideration for a seller from a tax perspective. The buyer has the opportunity to write off all that is allocated to the equipment price at the closing very quickly to substantially reduce any tax from operations during his or her early years of ownership. The seller may have older equipment that has fully depreciated, or his or her CPA may have written off the newer equipment very quickly within the allowable rules for doing so. That seller must report a taxable gain on the sale of the laboratory equipment based on the low “book value,” (cost minus depreciation) which is on record in the business and properly reflected on the tax return of the laboratory. Almost every amount that has been depreciated for the seller will now have to be “recaptured” in the proportionate dollar value attributed to the equipment, based on the sale price allocation on the closing statement or in the agreement of sale. If the owner was considering bonuses to long-term, loyal employees, this approach might prohibit those disbursements because of the tax the owner would pay.

Also, if the owner's goal was to have more funds available from the transition for personal use, the tax would substantially reduce that amount as well, based on this format. Normally, the more advantageous the tax treatment to one party during the sale of a business, the less assistance the other party receives. The objective is to try to arrange the sale of the laboratory so that both the buyer and seller achieve the best tax considerations available. This concept makes it easier to accept the consequences of the net amount needed and available for each party to the transaction. It creates more potential buyers. The following is a consideration for an approach that does not affect the buyer negatively from a tax perspective, yet substantially insulates a seller from a potential large income tax consequence at the time of sale.

If the laboratory has reasonable earnings and the owner wants more of a benefit from operations, there are additional retirement plan types that can be part of the enterprise. Because of non-discrimination testing of the labor force, which is required for the retirement plan to IRS acceptance upon review of the adoption papers filed by the laboratory, the older employees must have a similar plan to the owner, who would opt for a much larger contribution but would not want a comparable employee allocation. The following is one of the innovative parts to this concept: Employees can be grouped by job description, and if younger employees fall into a different category than the older, the owner can receive a much larger contribution on a current basis, using this kind of legal discrimination and different types of retirement plans. A very sophisticated approach is needed, but it works. By the time the owner is prepared to sell the laboratory, the amounts built into the allocated account for each employee will be much larger than if the 401(k), profit sharing, or SIMPLE IRA concept was used. If the idea was not in practice before the sale, the concept can be employed when the transition is ready to occur.

The premise is to have a transition whereby both buyer and seller feel they have not been burdened with taxes. If the advisors to the laboratory's buyers and sellers understand this idea, a sophisticated plan can be put in place so both buyer and seller can work toward its achievement. Laboratory owners who have profitable businesses have built good relationships with their professional dental clientele. The ages and job classifications of laboratory employees are critical, and it's necessary to have an advisor to the laboratory who has experience with the design of the plan. These people are a good source for references to qualified accountants with this type of expertise.

Bruce Bryen is the principal in the firm of RKG Tax and Business Services, LLC, in Fort Washington, Pennsylvania.