FAMILY & CHILDREN SERVIC - Advisory, Tax and Audit Services · Non-resident Owner Issues Owner...

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SURGICAL CENTERS FINANCE TRENDS AND UPDATES



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



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.



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



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



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:




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




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)



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



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.



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.




SINGLE-ROOM




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%



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.




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.




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.




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.




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.





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.







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.







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.




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)



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.




State Sales/Use Tax rates

CT 6.35%

NJ 7%

NY around 8% varies by location

PA 6%

RI 7%




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


NY Monthly deposits if prior quarter’s receipts are > $300,000 Annual if total liability is < $3,000


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



THANK YOU!

Rob Crigler, CPA

Morristown, NJ office

[email protected] (973) 898-9494

Barry Shapiro, CPA

Red Bank, NJ office


Jennifer Safeer, CPA

Toms River, NJ office


mailto:[email protected]



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