Prerequisites
- Both entities formed with EINs
- Bookkeeping current and per-entity
- A CPA with multi-entity and dental experience
The entity-level questions
The PC
The S election interacts with the friendly dentist’s personal taxes. Pass-through income flows to their return, which means the structure’s design affects their tax position. This is one of several reasons the dentist-owner needs their own advisors, and it should be discussed before the election, not after.
The DSO
The multi-state questions
Each entity, in each state where it operates:
A ten-state group may create support-company and practice filings in multiple jurisdictions. The number of returns depends on actual nexus, apportionment, entity classification, and local rules. Do not assume one return per state.
Transfer pricing hygiene
The management fee may fall within IRC § 482 where the statutory common-control standard is met; that standard is fact-based and broader than formal equity ownership.2 Do not collapse the standards. Transfer pricing, fair market value, commercial reasonableness, state fee-splitting, professional control, and federal referral rules can ask different questions. One valuation may inform several workstreams, but satisfying one does not establish the others. What creates exposure is a fee set to move income between jurisdictions, for instance, a fee sized to strip income from a high-tax state into a low-tax one. That is a § 482 problem and, separately, an FMV problem. Keep: the FMV analysis, the cost basis for the fee, the allocation methodology across PCs, the invoices, and evidence of actual payment.Intercompany loans
Loans between the entities must carry interest at no less than the applicable federal rate for the note’s term class. Below-AFR related-party loans trigger imputed interest under IRC § 7872 and invite § 482 recharacterization.3 The IRS publishes AFRs monthly. See Intercompany loans between DSO and PC.Information returns
Both entities have their own obligations:
Two employers means two sets of W-2s. A dentist or hygienist employed by the PC gets a PC W-2; an office manager gets a DSO W-2. Someone who moved between entities mid-year gets both.
The CPA question list
Bring these to the engagement:- Should the PC elect S-corp status, and what are the consequences for the dentist-owner personally?
- What is the deadline for that election given our formation date?
- Does our state recognize the S election, and does it impose entity-level tax anyway?
- Should the DSO be an LLC or a C-corp given our raise timeline, and when should we convert?
- Is QSBS relevant, and what would we need to do now to preserve eligibility?
- What are our nexus and filing obligations in each operating state, for each entity?
- How should management fee income be apportioned across states?
- Does our management fee methodology hold up as arm’s-length under § 482?
- What documentation should we maintain to support it?
- What rate must our intercompany loans carry, and how should accrued interest be handled?
- Are any of our retail product sales subject to sales tax?
- How should buildout and equipment for a new office be depreciated, and does Section 179 or bonus depreciation apply?
- What estimated tax payments should each entity be making, and from which account?
- How should credentialing-period and de novo ramp losses in a new PC be treated?
Practical hygiene
1
Fund a tax reserve account
In the DSO. Estimated taxes set aside so they aren’t mistaken for working capital.
2
Keep per-entity books clean
Tax filings are per entity. Consolidated-only books make every filing an excavation.
3
Retain the FMV and transfer pricing documentation
Contemporaneously, not reconstructed.
4
Calendar every filing deadline per entity per state
On the compliance calendar. See Set up your compliance calendar.
5
Review annually, and on every structural change
New state, new entity, fee change, or conversion.
Common failure modes
Sources
- IRC § 11(b). 26 U.S.C. § 11.
- IRC § 482. 26 U.S.C. § 482.
- IRC § 7872; IRS, Applicable Federal Rates.