First of all, let’s remember that we’re most likely in for more downward motion in the immediate future. Recently the American Institute of Certified Public Accountants proposed that the U.S. economy would not begin to recover until 2010. In a press release, the organization stated, “Companies are continuing to respond to economic conditions by cutting costs through layoffs, compensation limits, and hiring freezes.”
These people losing their jobs or taking pay cuts are your clients. And until this trend reverses and companies start hiring and providing raises again, your veterinary practice will most likely feel the effects. So far, specialty and emergency practices seem to be taking the worst of it, largely due to the cost of providing these services.
All in all, though, veterinary medicine is faring better than many other industries. Throughout the rest of 2009, the profession as a whole will most likely see little growth in sales, a slight downturn in the number of invoices, and a slight increase in the average invoice amount, mainly driven by pricing changes.
What does this mean for you? First and foremost, you need to watch your reminder system—it’s the economic engine that will get you through this ongoing rough patch. Put good monitoring controls in place, and you’ll minimize your client loss. To figure your reminder-compliance rate, divide the number of clients who’ve responded to a reminder within 60 days by the number of reminders sent. Compare your rate to this same time period last year to determine whether you’re experiencing a downward trend—and then take action accordingly.
Keep in mind that these days, fewer clients are responding to first and second reminders, so you’ll need to get innovative to get clients through the door. Send personal letters, e-mails, and re-reminders to clients who haven’t come in after six months. Be vigilant, and you’ll be rewarded with a fuller appointment schedule.
Now on to the changes in store based on President Obama’s stimulus plan.
Tax changes affecting individuals
To spur change, ease the credit markets, and put people back to work, the president signed the American Recovery and Reinvestment Act of 2009 on February 17, 2009, otherwise known as his economic stimulus plan. You’ve probably heard the highlights that will affect the majority of the population. For example, beginning April 1, people who are single and making less than $75,000 per year or married making less than $150,000 will see a paycheck increase. The impact? About $400 or $800 for single or married taxpayers, respectively, spread out over the course of the year. In case you’ve missed them, here are some other provisions:
Purchase a new car and get low-cost, favorable credit terms and a sales tax deduction attributable to the first $49,500 of the purchase price, as long as you make the purchase between February 17 and December 31, 2009. To qualify, your adjusted gross income must be less than $125,000 if you’re single or $250,000 if married.
Pay for college expenses in 2009 or 2010 and get a tax credit of up to $2,500 if you’re single and have adjusted gross income of $80,000 or $160,000 if married under the American Opportunity Education Tax Credit. This credit replaces the HOPE scholarship credit.
If you’ve never owned a home or haven’t owned a primary residence in the last three years and you make a purchase before December 1, 2009, you can not only take advantage of a buyer’s market and low mortgage rates (if you have good credit), but you’re also be eligible for an $8,000 homebuyer’s credit if your adjusted gross income is less than $75,000 if single or $150,000 if married.
The alternative minimum tax is still around, but the limit for when it kicks in has been raised from $69,950 in 2008 to $70,950 in 2009. The federal government will most likely not do away with this tax until Congress discusses income tax increases in general—and don’t expect this to happen until 2010.
Energy savings tax credits are back. If you spend money to save energy in your personal residence, you can receive a credit of 30 percent of qualified expenditures.
Tax changes affecting veterinary practices
Practices can benefit from extended favorable tax treatment related to the purchase of new equipment. We now continue with 50 percent bonus depreciation and an election to expense or write off up to $250,000 of equipment purchases in the year of purchase through the end of 2009.
Before, owners of veterinary corporations could have excluded from taxation 50 percent of the gain from the sale of their stock if they acquired the stock at original issue and the practice had less than $50 million in assets. Under Obama’s new act, the gain exclusion is up to 75 percent, but only through 2010. The stock must be held for five years before disposition. This provision is most likely to benefit multidoctor-owned hospitals whose owners are selling “C” corporation stock as a way to transition another owner to 100 percent practice ownership.
Also, if a practice was a “C” corporation and realized it was going to be subject to double taxation, the owners may have elected to be treated as an “S” corporation but needed to wait 10 years to avoid a double-tax issue known as the “built-in gain tax.” The stimulus act allows practices in this situation who made “S” corporation elections in 2002 or before to avoid the built-in gain tax by reducing the waiting period to seven years instead of 10. This reduced holding period is available only for practice sales in 2009 and 2010.
Hiring the disadvantaged has always been a good way to receive tax credits. Businesses are allowed to claim a work-opportunity credit equal to 40 percent of the first $6,000 of wages paid to employees of one of nine targeted groups:
• members of families receiving assistance through the Temporary Assistance for Needy Families program
• designated-community residents
• vocational rehabilitation referrals
• summer youth employees
• members of families receiving food stamp assistance
• supplemental security income recipients
• long-term family assistance recipients.
The new law expands the work-opportunity tax credit to include two new targeted groups:
• unemployed veterans
• disconnected youth.
Individuals qualify as unemployed veterans if they were discharged or released from active duty with the Armed Forces during 2008, 2009, or 2010 and received unemployment compensation for more than four weeks during the year before being hired. Individuals qualify as disconnected youths if they are between the ages of 16 and 25 and have not been regularly employed or attended school in the past six months.
An update on the veterinary lending climate
The lending outlook for veterinary medicine still looks good for practices with good credit. Local community banks have gained favor recently, and they may be your perfect bank partner if you’re looking for a line of credit for your practice or want to finance a new-equipment purchase.
If you’re in the market for a building loan and can put at least 20 percent equity into your project, local lenders are a good bet here as well, offering some of the most attractive terms, conditions, and lending rates. If you need a building loan but can’t put 20 percent down, financing is still available by way of the Small Business Administration, and SBA lending programs have been enhanced by way of the stimulus bill. The organization has made more money available and increased its guarantees, making it easier for banks to offer SBA loans.
While these provisions may make it easier to get a loan, the one provision that will impact you the most is the cost of fees to obtain a loan. SBA loans have always been expensive, with fees ranging from 2.75 percent to 3.5 percent of the loan guarantee. Included in the stimulus package is temporary SBA fee relief. SBA programs 504 and 7a, the two most common programs, qualify. This means that for a temporary time, SBA fees are waived. In fact, I recently watched a $40,000 loan fee disappear in a recent transaction I was involved in. That’s real savings.
Be aware that if you’re looking to purchase a practice with little or no money down, 100 percent financing is not as easy to get as it once was. Bankers are scrutinizing transactions more closely and have tightened their lending criteria. This doesn’t mean your transaction won’t be financed, but without a sizeable down payment, the lender might ask the practice seller to hold a piece of the sales price in a note and in a secondary collateral position. The SBA has also indicated that it will no longer finance goodwill in a transaction in excess of $250,000. Again, this makes it difficult (but not impossible) to finance practice purchases through SBA programs.
SBA lenders are also now required to get a practice business valuation to close a transaction. So if your transaction doesn’t make financial sense, it won’t get financed. Sellers have to come up with a reasonable asking price based on standard valuation methodology used in the veterinary profession. If not, the transaction will mostly likely not be financed or the seller will have to finance the portion that will not appraise. Sellers beware—one times gross sales doesn’t cut it anymore. Veterinary-specific lenders that finance practice purchases also use standard analysis to close reasonable transactions.
So while there’s a lot of stimulus beginning, taking advantage of these provisions personally and in business will be challenging. Let’s all hope they’re the right things to bring hope and prosperity back to the American economy—and the veterinary profession.