Sax FOCUS Newsletter July 2023

FROM INSIGHT TO IMPACT: HARNESSING INDUSTRY TRENDS FOR FUTURE SUCCESS

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An Important Planning Step Gift Tax Returns:

WRITTEN BY JOY MATAK, JD, LLM

With the federal estate tax exemption currently at $12.92 million per U.S. person, individuals have an opportunity to transfer significant wealth. In general, taxpayers are required to disclose any gift exceeding $17,000 (in 2023) on a Form 709 in the year following the transfers.

Since the gift and estate tax are based on the concept of a unified credit, gifts are aggregated and disclosed again on an estate tax return. A wellprepared gift tax return that meets the adequate disclosure requirements outlined in Treas. Reg. Sect. 301.6501(c)-1 will start the statute of limitations running, giving the IRS only three years to challenge a transaction. On the other hand, failure to satisfy the rules for adequate disclosure on a gift tax return could give the IRS an unlimited window to overturn a transaction many years after the fact.

1. Why is filing a gift tax return so complicated?

Filing a gift tax return appears to be a simple thing. After all, the form the IRS offers to report gifts is short – only five pages! And yet, we often find ourselves producing reams of paper to support the disclosures about the planning that had been done.

Lack of sufficient supporting documentation could prevent the statute of limitations from running and potentially invite follow-up communications from the IRS about the planning transactions. Of course, a “kitchen sink” approach to filing gift tax returns

is not just about meeting adequate disclosure requirements to run the statute of limitations. Where a taxpayer can demonstrate a good faith attempt to comply with the rules set for disclosing transactions, the IRS may decide to accept the return as filed and leave the client alone. In such cases, the taxpayer would be able to point to an exhibit that had already been provided in response to most questions that an auditor might ask.

2. A gift tax return supports the planning.

Strategic planning can protect assets from creditors while allowing the wealth you create to grow into a great legacy for your loved ones, their children, and future generations of your family. Transferring significant wealth is often a long process. We spend time evaluating the opportunities available to our clients in order to construct unique plans that resemble their goals.

A gift tax return is the first time the IRS will learn about the planning that has been done. The process allows a taxpayer to dictate the initial terms of any potential review that the IRS might undertake relative to the planning. Further, by adequately disclosing planning transactions on a gift tax return, the taxpayer starts the clock running on a three-year statute of limitations.

3. The gift tax return provides advisers with a second, thorough look.

Sophisticated planning is often multi-faceted, involves

Estate Planning

many documents, and often requires input from advisers in different disciplines: attorneys, wealth advisers, accounting professionals, appraisers, life insurance agents, and others. Sometimes, planning is rushed, and despite our best efforts, things might be missed.

During the gift tax return preparation process, the preparer will have the opportunity to review the documents and hopefully identify anything that might have been missed or need correcting – before the IRS is alerted about the plan. The preparer can then reach out to other advisers to make the necessary corrections so that the gift tax return –and the planning – is complete.

4. A gift tax return preparer could identify additional steps to bolster the plan.

Recent cases decided by the Tax Court (against the taxpayers) highlight additional steps that taxpayers could take to fortify the planning that had been done. An accounting professional preparing a gift tax return might be particularly well-situated to identify these opportunities:

a. Issue a Schedule K-1 from an entity that was transferred as part of the estate plan;

b. Use the income tax returns to identify any valuation adjustments that might later be made to the plan if values are changed on audit;

c. Make sure that distributions are being made and that the correct taxpayer pays the income tax.

Implementing these steps might be done as part of the gift tax return preparation process. As planning gets more complicated, explaining transactions thoroughly on a gift tax return and supporting it with attendant documents could make administering the plan easier.

Conclusion

Creative planning approaches have created additional and sometimes novel gift tax reporting considerations. Disclosures should be carefully constructed. Preparing a gift tax return is a vital step in the planning process to protect clients and fortify their estate plans.

About the Author

Joy Matak, JD, LLM is a Partner at Sax and Leader of the firm’s Trusts and Estates Practice.

She has more than 20 years of diversified experience as a wealth transfer strategist with an extensive background in recommending and implementing advantageous tax strategies for multigenerational wealth families, owners of closely-held businesses, and high-net-worth individuals including complex trust and estate planning. Joy can be reached at jmatak@saxllp.com

Weal

Is Social Security Going Bust?

In Planning for Retirement, One Topic is Often Top of Mind: What if Social Security Goes Bust?

WRITTEN BY SAX

WEALTH ADVISORS

Wealth Management

As we covered in a related post, When Should You Take Your Social Security, most of us have been paying into the program our entire working life. We’re counting on receiving some of that money back in retirement.

But then there are those headlines, warning us that the Social Security trust fund is set to run dry around 2034. Does this mean you should grab what you can, as soon as you’re able? Let’s explain why we agree with Social Security specialist Mary Beth Franklin, who suggests the following:

But let’s unpack this statement. First, “depleted” does not mean the Social Security Administration is going to turn out the lights and go home. It means it could run out of trust fund reserves by then, which are used to top off the total amount spent on Social Security benefits. There are still payroll taxes and other sources to cover more than 77% of the program’s payouts. So, worst case, if we did nothing but wait for the reserves to run out, we’d be forced to make hard choices about an approximate 23% shortfall starting around 2034.

Why We Believe Social Security Will Change

While there may be good reasons to file for reduced Social Security benefits early, claiming Social Security prematurely out of fear is a bit like selling stocks in a down market: All you’ve guaranteed is that you’ve locked in a loss. And if future benefit cuts did materialize, the benefits of those who claimed as soon as possible would be reduced even further.”

— MARY BETH FRANKLIN, INVESTMENTNEWS

Why We Believe Social Security Will Endure

While we don’t expect Social Security to go bust, we do expect it will need to change in the years ahead. As its trustees have reported:

Admittedly, Social Security is between a rock and a hard spot. Nobody wants to lose benefits they’ve been counting on, or spend significantly more to maintain the status quo. But if we don’t do something to shore up the program’s reserves, our options will likely only worsen.

“My gut sense is that practically no politician in America would ultimately be happy having to explain to voters why they let Social Security collapse on their watch … That’s not a great message to have to bring to voters, especially older voters who show up at the polls in the greatest numbers.”

“Social Security is not sustainable over the long term at current benefit and tax rates … [and] trust fund reserves will be depleted by 2034.”

As members of Congress wrangle over the “best” (and least abhorrent) solutions for their constituents, they have been submitting proposals behind the scenes, and the Social Security Administration has been weighing in on the estimated effect for each.

Time will tell which proposals become legislated action, but the range of possibilities essentially fall into two broad categories: We can pay more in, or we can take less out. Most likely, we’ll need to do a bit of both.

Paying More In

To name a few ways to replenish Social Security’s reserves, Congress could:

Raise the cap on wages subject to Social Security tax: As of 2023, earnings beyond $160,200 per year are not subject to Social Security tax. There’s been talk of increasing this cap, eliminating it entirely, or reinstating it for income beyond certain high-water marks.

Increase the Social Security tax rate for some or all workers: Currently, employers and employees each pay in 6.2% of their wages, for a total 12.4% up to the aforementioned wage cap. (This does not include an additional Medicare tax, which is not subject to the wage cap.) As cited in a September 2022 University of Maryland School of Public Policy report, “73% (Republicans 70%, Democrats 78%) favored increasing the payroll tax from 6.2 to 6.5%.”

Increase the tax on Social Security payouts, and direct those funds back into the program: Currently, if your “combined income” exceeds $44,000 on a

joint return ($34,000 on an individual return), up to 85% of your Social Security benefit is taxable, as described here. Anything is possible, but taxing retirees more heavily seems less politically palatable than some of the other options.

Identify new funding sources: For example, one recent bipartisan proposal would establish a dedicated “sovereign-wealth fund,” seeded with government loans. Presumably, it would be structured like an endowment fund, with an investment time horizon of forever. In theory, its returns could augment more conservatively invested Social Security trust fund reserves. Other proposals have explored a range of potential new taxes aimed at filling the gap.

Taking Less Out

We could also cut back on Social Security spending. Some of the possibilities here include:

Reducing benefits: Payouts could be cut across the board, or current bipartisan conversations seem focused on curtailing wealthier retirees’ benefits.

Extending the full retirement age: There are proposals to extend the full retirement age for everyone, or at least for younger workers. This would effectively reduce lifetime payouts received, no matter when you start drawing benefits.

Tinkering with COLAs: There are also bipartisan conversations about replacing the benchmark used to calculate the Cost-of-Living Adjustment (COLA), which might lower these annual adjustments in some years.

Wealth Management

These are just a few of the possibilities. Some would impact everyone. Others are aimed at higher earners and/or more affluent Americans. It’s anybody’s guess which proposals make it through the political gamut, or what form they will take if they do.

Should You Take Your Social Security Early?

So, given the uncertainties of the day, should you start drawing benefits sooner than you otherwise would? An objective risk/reward analysis helps guide the way.

Many investors feel “safer” taking their Social Security as soon as possible, to avoid losing what seems like a bird in the hand. However, the appeal of this approach is often fueled by deep-seated loss aversion. Academic insights suggest we dislike the thought of losing money about twice as much as we enjoy the prospect of receiving more of it. Thus, we tend to cringe more over a potential loss of promised benefits than we factor in the substantial rewards we stand to gain by waiting. Put another way:

You’re not reducing your financial risks by taking Social Security early. You’re only changing which risks you’re taking. In exchange for an earlier and more assured payout, you’re also accepting a permanent, cumulative cut to your ongoing benefits. If this still seems like a fair trade-off, consider that Social Security is one of the few sources of retirement income ideally structured to offset three of retirement’s greatest risks:

1. Life expectancy risk: In an annuity-like fashion, Social Security is structured to continue paying out, no matter how long you and your spouse live.

2. Inflation risk: The payouts are adjusted annually to keep pace with inflation.

3. Market risk: Even in bear markets, Social Security keeps paying, with no drop in benefits.

In short, if you are willing and able to wait a few extra years to receive a permanently higher payout, you can expect to better manage all three of these very real retirement risks over time.

This is not to say everyone should wait until their Full Retirement Age or longer to start taking Social Security. When is the best time for you and your spouse to start drawing benefits? Rather than hinging the decision on uncontrollable unknowns, we recommend using your personal circumstances as your greatest guide. Consider the retirement risks that most directly apply to you and yours, and chart your course accordingly.

But you don’t have to go it alone. Please be in touch if we can assist you with your Social Security planning, or with any other questions you may have as you prepare for your ideal retirement.

An Introduction to Nonprofit Governance

A Practical Guide to the Challenges of Nonprofit Governance and How Your Nonprofit Can Combat Three Common Types of Board Structures

WRITTEN BY ADAM HOLZBERG, CPA, MBA & LAUREN FRARY, MA, LRC

Nonprofit governance is becoming a greater and greater challenge for both the volunteer members of the board and its management as the industry continues to adapt and change in the current socioeconomic environment. The board of a nonprofit is there to ensure that the mission of the nonprofit is being fulfilled and to take on the fiduciary oversight to ensure the nonprofit remains sustainable.

However, in the current environment, board governance issues are beginning to form or are now fully exposed as financial complexities arise caused by the fiscal impact of the pandemic, technology is providing greater public oversight than ever before (and with that, greater public scrutiny), and the social environment remains in flux creating questions on what role nonprofits should play. However, in the current environment, board governance issues are beginning to form or are now fully exposed as financial complexities caused by the fiscal impact of the pandemic arise. Technology is providing greater public oversight than ever before (and with that, greater public scrutiny), and the social environment remains in flux, raising questions on what role nonprofits should play.

As these issues continue to provide pressure on nonprofits and their governance, board members should work closely with management to ensure that the nonprofit has the right tools in place to ensure it is being properly led in these difficult times. Primarily, nonprofits should be honest with themselves and see if they have any of the characteristics of a dysfunctional board.

While several types of issues can lead to dysfunction, we have grouped the issues into three main types: the apathetic board, the micromanaging board, and the factionalized board.

Apathetic Boards

While many join a board because they care deeply about the organization’s mission and success, that does not necessarily mean they can always stay fully engaged. An apathetic board is simply no longer interested or has the time to invest in the nonprofit’s activities. This board leaves the Executive Director alone and merely approves everything without much thought or care. By doing so, the board has given up its role in governance.

It is no longer providing the necessary oversight over management to ensure that the public funds are being used correctly and sustainably and, in turn, doing a significant disservice to the community that the nonprofit serves. The board is no longer considering the organization’s long-term strategic plan and instead has fully left management to their own devices. While this may sound like a net positive to management on paper, proper oversight is vitally essential and confirms management’s actions when the board is actively engaged. In the long run, there are no differing opinions or other thoughts to help drive the nonprofit forward.

Resolutions

Although many board meetings involve some repetitive practices, it does not mean they should become mundane. Here are a few tips to keep the boardroom active and fresh:

1. Make sure agendas reflect current and new topics. If you merely change the date on the top of the agenda each month, it is time to rethink your agenda. Each agenda should have something new or unique (a speaker, a program highlight, a mission moment). Agendas should also be designed by both the CEO and Board President in a collaborative process. Finally, ensure agendas and meetings have topics that will spark the interest of the entire board membership.

2. Plan meetings in different spaces. Give a program tour prior to a meeting and then meet at the program location. Book a creative space (libraries and other community spaces are often free for nonprofits). Make sure seating is conducive to participatory processes.

3. Create agendas and presentations that focus on interaction. Although CEOs must present information during meetings, the data can be presented in a way that sparks robust conversation. Leaders should not only present the facts but also ask questions of the board to elicit feedback and encourage dialogue.

Micromanaged Boards

On the other end of the spectrum is a micromanaged board. Unlike an apathetic board, which is not involved at all, the micromanaged board is too involved in the nonprofit’s activities. This board has become too involved in the day-to-day functions that are typically left to the management of the nonprofit. In a typical board setting, the board of a nonprofit has one employee: the Executive Director (or Chief Executive Officer, depending on the title). This individual runs the organization’s day-to-day with the staff and reports their activities to the board. The board provides oversight and evaluates the performance of this individual.

In a micromanaged board, the board oversteps its role and positions itself into many of the duties of the Executive Director. This leads the nonprofit’s leadership to become disempowered and lose confidence in their abilities as they feel secondguessed by the board’s overreaching. The board could take it a step further and begin to go around the Executive Director and give tasks to other key members of the organization.

Resolutions

Boards that micromanage tend to believe that they are helping the nonprofit by lending their skills and knowledge to improve outcomes. They assume that “doing” is how they will help – not understanding their role is supporting and guiding. Unfortunately, boards that micromanage are also in organizations led by people who need to improve their leadership skills. As such, the first order of business is to obtain coaching for the CEO/ED. In addition, several initiatives by the CEO can reduce or eliminate the board’s need to micromanage:

• Onboarding board members – board members/ officers should receive an application and a written set of expectations to guide and define their work.

• Board orientation should be conducted annually and include a reminder of the expectations and direction and sign-off on key policies (nondiscrimination, conflicts of interest, code of ethics, etc.). This helps to set the tone of shared responsibility.

• Engage the board in strategic discussions by providing agenda items that support the strategic plan and vision of the organization without getting into operational details.

• CEO and Board Presidents must agree on their roles and the fact that the leadership of the organization is a shared responsibility. These two key leaders should hold regular meetings to discuss agenda items, challenges, and successes.

Adam Holzberg, CPA, MBA is a Partner at Sax and specializes in audits, accounting and advisory services for closely held companies and non-profit organizations. He focuses on increasing the overall operational efficiencies, financial reporting best practices, and internal controls for clients. He can be reached at aholzberg@saxllp.com

About the Author

Factionalized Boards

The last type of board is a factionalized board. These boards can be broken down into type types: internal factions that oppose one another in the organization’s direction or board members who have their own personal pet projects and do not care about the other parts of the organization as a whole. While how they become factionalized may differ, the problems they cause remain the same. This board no longer has the organization’s best interest at heart and instead focuses on smaller items than seeing the big picture.

Their interests remain focused on just aspects of the organization, leaving management stuck in the middle and being the only one focused on the organization’s big picture. This type of board becomes an even greater problem in times of financial instability as decisions about programs will likely need to be made. These decisions are hard for a properly functioning board, but when a board is not focused on the entire organization, decisions are no longer being made with the best intentions.

Resolutions

When Board members cannot build consensus, meetings come to a halt and little, if anything, is accomplished. Board meetings take on a repetitive and uncomfortable tone, while the organization’s mission needs to be made aware of the debate. To avoid a fractionalized board, here are three things that the leadership can implement:

• Ensure the board participates in the strategic planning process to promote cohesion among members and the organization’s strategic priorities (big picture).

• Facilitate an annual retreat, where board members share their vision of the organization and agree on the priorities for discussion at board meetings.

• Consider facilitating a time for the board members to engage socially (holiday party, summer picnic, etc.). Boards that socialize together are much more effective at managing conflict.

Conclusion

It’s difficult to tease out the factors that make one group of people an effective Board of Directors and another equally talented group of people a dysfunctional one; well-functioning, successful Boards usually have a chemistry that can’t be quantified. They seem to get into a virtuous cycle in which one good quality builds on another. Effective Boards and Executive staff members must develop mutual respect and articulate complex ideas to the group with room for open discussion. This type of Board will support the nonprofit’s mission and

Non-Profit

About the Author

Lauren Frary, MA, LRC is the Director of Strategic Business Transformation and specializes in working with nonprofit organizations to develop goals and objectives to improve overall functioning and processes. In addition, she provides Leadership Transition and Coaching, as well as customized workshops and seminars that meet the unique needs of each organization. She can be reached at lfrary@saxllp.com

What Type of Business Entity Should Your Cannabis Company Be?

WRITTEN BY ADAM HOLZBERG, CPA, MBA

There are many factors for cannabis operators to consider when choosing the type of business entity to establish. The choice will ultimately have many tax and legal implications, and the most optimal choice will likely depend on your business’s specific circumstances. However, there are significant advantages and disadvantages to each business entity type that cannabis companies typically choose from. This is taken a step further because cannabis remains illegal on the federal level and is subject to IRC Section 280E which prohibits deductions and credits for companies carrying on trade or business involving the trafficking of controlled substances, such as cannabis. As a result, selecting a business entity becomes an even more difficult challenge. Cannabis companies are typically formed as either a partnership (through a limited liability company), a C corporation, or an S corporation.

Partnerships and S Corporations

Partnerships and S corporations are similar in that they are both referred to as “pass-through entities” as the income, deductions, credits, and losses are passed through to each owner’s tax return. Both avoid any double taxation that is seen with C corporations. However, because the tax liability is passed through to the owner, the owner is directly responsible for paying the onerous taxes created by IRC 280E. The tax being levied will occur regardless of the amount of distributions paid to the owners.

This could result in a scenario where the tax liability exceeds the distributions paid out.

Additionally, self-employment taxes are typically assessed on the owners’ returns. S corporations have further restrictions on the number of owners in the entity and who can have ownership. Also, S corporations must pay owners “reasonable compensation,” which would be non-deductible due to IRC 280E.

C Corporations – Advantages and Disadvantages

Shareholders in C corporations have the advantage of not being personally responsible for the debts and obligations of the company. Under a C corporation, the corporation is responsible for the tax, and that liability does not pass through to the owners. However, any funds distributed to the shareholders as a dividend will be taxed individually. This is referred to as double taxation because the corporation first pays taxes on its profits. Then shareholders pay personal income taxes on the dividends received from the company’s profits.

However, C corporations tend to be favored by outside investors. As its typically a matter of when it comes to IRS audits of cannabis companies, not if, investors in a C corporation do not have to worry about an audit extending to their assets. This is typically seen as a significant advantage of C corporations over the other entity types, as protecting personal assets is a huge concern.

An additional advantage of a C corporation is that they can take advantage of IRC Section 1202, which allows eligible shareholders to potentially exclude from capital gains the greater of $10 million or ten times their basis in the corporation on the sale of qualified small business stock (“QSBS”). While Section 280E denies any deduction or credit, Section 1202 excludes a gain from tax recognition which means it is neither a deduction nor a credit. The resulting benefit of Section 1202 is a significantly reduced capital gains tax for the shareholder or potentially no tax liability at all at the time of sale. To qualify as QSBS, the stock must satisfy all the following:

1. Be a domestic C corporation

2. Have at least 80% of its assets used in an active trade or business

3. Stock was issued after August 10, 1993

4. Stock is owned by an individual or entity other than a C corporation

5. Stock was acquired by the owner on the original issuance

6.

Stock must be held for more than five years

Additionally, farming activities are prohibited from QSBS, which would likely prohibit cultivators from taking advantage of this tax law.

Each type of business entity has its pros and cons, and each cannabis operator needs to weigh all the

factors when determining which one makes the most sense to them. Cannabis operators should evaluate their growth goals and their investors’ needs when determining the appropriate business entity type. A consultation with a qualified tax professional should occur before any business entity is picked to ensure that you choose the right entity for your company’s needs.

About the Author

Adam Holzberg, CPA, MBA is a Partner at Sax and focuses on increasing the overall operational efficiencies, financial reporting best practices, and internal controls for clients. As a member of the Sax Cannabis Practice, Adam supports companies from seed to sale in a variety of areas including but not limited to innovation and growth strategies, attestation services, tax compliance, and pre-licensing consulting. He can be reached at aholzberg@saxllp.com

So You Want to Open a Med Spa:

Understanding The Future of Medical Aesthetics

WRITTEN BY DEBBIE NAPPI, CPA, MST

A medical spa, often known as a med spa, is a practice that offers cosmetic medical procedures in a spa setting. Med spa services typically include a variety of skincare and aesthetic treatments.

Med spas are rapidly becoming more and more popular in the United States. In 2022, the global med spa market was valued at $16.4 billion, and by 2030, it’s projected to be a $50 billion industry. This rapid growth is occurring in response to the increasing demand for minimally invasive cosmetic procedures and a greater consumer emphasis on wellness and self-care. For recurring treatments like Botox injections, a soothing spa setting is a much more comfortable place to receive treatment than a physician’s office.

Opening a med spa can be an appealing business idea as the industry matures. If you’re considering making a med spa your next business venture, there are a few key points to keep in mind:

• In New Jersey and New York, as well as some other states, a physician must own and operate a med spa.

• Because a med spa is a medical practice, it must meet state and federal requirements.

• State guidelines determine which services may be offered and the supervision required for each.

In addition, it’s also crucial to familiarize yourself with the general process of starting a business before you move forward with a business plan and other considerable investments.

Beyond rent and other initial startup costs, you need to budget for business formation fees, insurance, staff compensation, utilities, and any remodeling necessary to transform the space you choose into a med spa setting.

Choice of entity formation

Some states, including New Jersey and New York, abide by the corporate practice of medicine doctrine. Companies that employ physicians to provide medical services must be incorporated according to their respective states’ professional service corporation’s requirements. It’s also why med spas in these states must be owned and operated by physicians—a physician is qualified to practice medicine, but a corporation isn’t.

As you create your med spa business plan, plan your incorporation carefully. Failure to properly structure the business entity can result in governmental penalties and the facility’s closure. Whichever structure you choose, be sure to register it appropriately with your state and the IRS.

LLC/Partnership

All med spa LLC or partnership members in New York must be licensed physicians. New Jersey has a similar requirement, requiring that all members be licensed and authorized to render medical services or closely allied professional services. Examples of individuals who may fit the latter category include physical therapists, nurses, nurse midwives, and optometrists.

Corporation

It’s also possible to register a med spa business as a corporation. Still, in New Jersey, it must be licensed by the New Jersey Department of Health and Senior Services and comply with the Department’s requirements. In New York, the shareholders must all be licensed physicians.

Both structures have benefits and drawbacks. There is no “one size fits all” option for incorporating a business; the best structure is the one that most appropriately fits your business’s unique needs. We can discuss corporate structures, their benefits, and their requirements with you in detail and assist you in this process.

Contracts and agreements - well-written agreements

In both New Jersey and New York, a non-physician can invest in a med spa through a management service organization (MSO), which provides professional services to the spa. These services include billing, marketing, staff training, and vendor management. However, any med spa working with an MSO must be very careful to remain compliant with state laws regarding the operation of a med spa—stepping outside prescribed requirements can result in fines and other penalties. If you’re considering going the MSO route, it’s critical that you have a clear, airtight contract that spells out exactly how the MSO is to operate. This is just one of the multiple contracts you’ll need your healthcare attorney to draft your med spa business.

Others include:

• Facility lease. Unless you purchase a building for your med spa, you’ll need to lease a space appropriately sized for your services.

• Equipment leasing or purchase. Medical equipment and non-medical business equipment like computer networks and office furniture require a significant capital investment. You may decide to structure your agreement to allow you to lease or buy additional equipment as your practice grows.

• Retail skincare products. Although not a requirement, many med spas increase their revenue by selling skincare products to patients. Consult with your tax advisor for the sales tax reporting requirements for the sale of these products within your state.

• Medical supplies and consumables. Unlike equipment, a one-time purchase or lease, you’ll need to continually purchase medical supplies and consumables like alcohol prep pads, gloves, gels, lotions, and syringes for your med spa operations.

Compliance: HIPAA compliance and medical records

As a medical practice, a med spa is required to comply with HIPAA and all other federal laws regarding medical records, such as HITECH

Compensation structure

Similarly, a med spa is subject to the same compensation structure requirements as any other medical practice. This means fee-splitting is prohibited, as are any payments for referrals.

As you develop your compensation structure, whether it’s salary-based or pays physicians and other staff members hourly or per procedure, ensure that it’s compliant with applicable laws by having it reviewed by an experienced healthcare attorney. This extends to how your MSO is compensated if you partner with one.

Advertising restrictions for a healthcare entity

It’s worth mentioning again: Services offered in a medical spa constitute the practice of medicine and must be treated accordingly.

That means your spa is required to meet the same advertising restrictions as any other medical practice. Your advertising may not misrepresent your credentials, expertise, or skills. Similarly, your advertising cannot be deceptive or misleading in any way, such as implying that a particular patient outcome is guaranteed.

Benefits of a Med Spa

Despite all the legal requirements and significant capital investment necessary to open a med spa, there’s a reason why so many physicians choose to take their careers in this direction: med spas are profitable.

Operating a med spa is quite different from operating a private practice. One significant difference is that healthcare insurance coverage rarely covers the procedures offered by med spas. Although there are exceptions, med spa services are cosmetic and nearly always elective for the patient. Because of this, patients nearly always pay out of pocket, and you do not need to negotiate with insurance providers for the reimbursement of the services provided.

With the elimination of having to negotiate with insurance providers, you have the freedom to offer more customized treatment packages. For many patients, aesthetic services are part of their regular healthcare routines. As their provider, you can offer recurring treatment packages, long-term treatment plans, and price points that accurately reflect the services the patient receives.

Med spas are also relatively recession-proof businesses. Even during economic downturns, med spas offer a way to look good, feel good, and enjoy a brief moment of respite from everything else happening in the patient’s life. As more and more Americans prioritize wellness and embrace self-care, med spas will only become more cemented into the American healthcare landscape.

Pitfalls of a Med Spa

Alongside all the benefits med spas offer, it’s also important to acknowledge their pitfalls. Perhaps the

biggest challenge that comes with operating a med spa is medical compliance. Ultimately, you’re still a medical provider that requires adherence to the same federal and state requirements as any other provider.

Each practitioner’s license must be in good standing, marketing efforts must comply with federal and state law, practitioners must carry malpractice insurance (depending on the state), abide by HIPAA patient privacy requirements…the list goes on and on. The easiest way to ensure you don’t miss anything is to write a comprehensive compliance checklist with your attorney or business advisor, then refer back to it continually as you file for appropriate licenses, draft contracts, and move forward with launching the med spa.

Work with an Experienced New York and New Jersey Healthcare Industry Advisor

As you consider your entrance into the med spa space, let us assist you in the myriad of regulatory compliance matters from the earliest stages of business planning to ensure the success of your new business venture.

At Sax, LLP, our team is uniquely equipped to advise you on the best ways to move forward with your med

About the Author

Debbie Nappi, CPA, MST is a Partner at Sax LLP, and serves as Co-Leader of the firm’s Healthcare Practice. She is an advocate for her clients, and specializes in consulting services, revenue cycle management and physician productivity in the rapidly changing landscape. She can be reached at dnappi@saxllp.com.

What Construction Businesses Should Know

About Expanding Into Another State

WRITTEN BY MATHEW J. GIORDANO, CPA, MST

So it looks like your next move is expanding into another state. Maybe your business is scaling, maybe personal reasons are bringing you and your business elsewhere, or maybe you want to capitalize on all the construction action happening in other states. Whatever your reason for planning to open up shop in a new state, the first step is understanding the requirements you have to meet.

Understanding these requirements ahead of your expansion will make the entire process smoother, simpler, and less expensive for your business. Don’t miss out on valuable time in a new state’s market or cut into your profits with a ton of fees and penalties by overlooking any requirements or inadvertently failing to comply with the law. We know expanding (or moving) a construction business to a new state can be a complicated process, so we put together this guide to help you understand the main steps.

Registration with the Secretary of State or Business Bureau

Before you can do business in a new state, you need to register your business with that state’s Secretary of State or Business Agency/Bureau. This varies according to the state.

Regardless of where you plan to operate, you don’t need to go through the new business formation process again. Instead, you can register as an outof-state business. This is known as registering as a foreign entity. When you register as a foreign entity, you must file for a Certificate of Authority and pay all associated fees. This is a straightforward process you can usually complete online.

To register as a foreign entity, you must provide copies of your original formation documents and pay the associated fee. This fee varies according to the state where you are registering. In many states, you must also provide a Certificate of Good Standing from the state where you formed your business.

As a contractor, you also need to ensure you’re licensed to work in your new state. When you initially became licensed, you needed to meet certain requirements, like EPA certification and a passing score on the applicable exam.

Depending on which state you’re moving into, you might need to get re-licensed…or you might be able to operate using your existing license, provided it’s

still current. This is known as reciprocity. Some states have reciprocity agreements that allow contractors to operate without becoming licensed a second time. Once your business and license are registered, you’re legally permitted to operate in your new state.

Registration with the Proper Departments, Divisions, and/or Boards

Following registration of your business with the state, you must name a registered agent for the business. This individual is the go-to person for all legal and tax-related inquiries in the new state.

The next step is to register to pay state taxes and report your annual fees. Most states’ websites include areas for forming new businesses and registering foreign entities. In this section of the website, you’ll find information about the agencies with which you must register. Generally, these include the:

• Department of the Treasury

• Division of Unemployment Insurance

• Department of Labor

• Department of Tax and Fee Administration

• Department of Revenue

Keep in mind that these departments’ titles can vary from state to state.

Failure to register with the appropriate departments, divisions, and boards may result in penalties and fees.

Income Tax

Most states require corporate income taxes. If you are operating in one or more of these states, you need to register for and pay the applicable corporate tax for those states.

You also need to familiarize yourself with your new state’s payroll taxes process and amounts, then ensure you’re in compliance with these requirements.

Similarly, if your business owns property in its new state, you may need to pay the applicable property taxes. Basically, despite operating as a foreign entity, you’re required to comply with the same tax requirements as any other business operating in the new state.

Sales Tax

The sales tax rate varies from state to state. In the states that don’t have sales tax, individual municipalities may impose a sales tax. This also occurs in some states that do impose a state-wide sales tax. When you bring your business to a new state, you must register to collect sales tax in that state. This is generally handled by the Department of Taxation.

Sales tax definitions and transactions can vary from state to state. For example, while Delaware doesn’t have sales tax in the traditional sense, it does impose a gross receipts tax on certain services and goods.

Employer Taxes and Insurances

When you hire new workers in your business’ new state, the rules regarding payroll taxes and insurance may be different from those that apply to any existing employees you send to work in the new state. There may also be different requirements for current workers that you send into the state depending on how much time they spend working there. These tax and insurance policies include:

• Unemployment compensation

• Workers’ Compensation

• Family leave

• Disability coverage

Familiarize yourself with the employer withholding requirements for your business’ new state. This is often found on the Department of Taxation’s website.

Legal Ramifications

Another important issue to consider is the legal ramifications of any alleged misconduct or violations that occur in your new state. Generally, civil lawsuits are filed in the jurisdiction where the defendant lives or where the alleged violation occurred. This means that if you face a lawsuit in your new state, it’s likely that the legal proceedings will be held in that state.

However, that’s not always the case. It’s possible for court proceedings to occur where a company is headquartered, even if that isn’t where the alleged violation occurred.

With regard to employee protection and compensation laws, such as those related to the minimum wage and possible hours requirements, you must comply with the state law where the work is performed. For example, if you register your New York company as a foreign entity in Ohio and conduct business there, you must comply with Ohio employment laws.

Work with an Experienced Construction Accounting and Tax Advisory Firm

When you expand your business into additional states, you can be subject to different requirements than you’ve previously been accustomed to. Stay on top of these requirements, including tax liabilities and how to plan for them, by working with an accounting and tax advisory firm that understands the construction industry. At Sax, LLP, our team is uniquely equipped to serve your business’ unique needs, including working with you to develop a plan to seamlessly expand into a new state and avoid any tax or compliance surprises.

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