Shoring Up Your Business’ Blind Spots

December 7, 2020

Michael Zervas  0:01  Welcome to the healthcare huddle. Today we have a very informative guest Toby Clary, who is a CPA, as well as a CVA, a certified valuation analyst that specializes in managing, running and providing value on healthcare practices. He talks a lot about the do’s and don’ts of running a practice the struggles and opportunities that exist from his perspective and also, he has some really interesting thoughts on how to proceed forward with your loan forgiveness if you were lucky enough to get a PPP, so listen in and take some notes because Toby’s got a lot of great content for us today.

Speaker 0:47  It’s time for the healthcare huddle, simplifying the business of health care, presented by encompass medical devoted to help an organization succeed with customized medical practice management services visit encompass medical comm today. Now, here’s your host, Michael zervas.

Michael Zervas   1:10  I’m happy today to have our guests Toby Clary, who’s a CPA that specializes in running health care practices. Joining the show today, Toby has an interesting journey to becoming a CPA at his firm soukup in bush. And he’s got an extensive experience set that I imagine informs his ideas, and his views on managing and running healthcare practices and given existential issues that we have in healthcare with the pandemic and all the regulations and attempts to manage this situation we find ourselves in and I was excited that he agreed to come on today. Before we start though, I’d like to give you the dear listener a quick overview of Toby’s bonafides. He’s quite accomplished and quite unmatched in this world of business and management and CPAs and valuations. And he’s a member of both the American Institute of CPAs, and the National Association of Certified analyst, he’s president of the Northern chapter of the Colorado Society of CPAs. He’s also a member of the Intuit pro Connect tax customer Council. So he comes to us with a lot of experience knowledge and views that he garners from around the country, Toby, thank you for making the time today.

Toby Clary 2:26  You’re very welcome.

Michael Zervas  2:27  I really appreciate it. I’ve had the good fortune to know Toby for multiple years now and been able to work with him on different projects, and I find him to be insightful. But before we get to that, Toby, you’ve mentioned to me before that your journey to becoming a CPA and into healthcare was not necessarily a direct path. And I was hoping you might start us off by sharing that journey a little bit.

Toby Clary  2:52  Sure, you know, with CPAs, I found there’s one of two ways you become a CPA, you either are born into a family where your father, your mother, you know, an aunt, uncle, grandparent was a CPA and you’ve decided that that’s the path you want to take. Or similar to mine, it just kind of hits you upside the head one day, and you realize this is something that I should follow. For me, I went to school with the idea of getting a business management degree in order to then go to culinary school after that. 

Michael Zervas   3:27  Wait a second, hang on, culinary school. 

Toby Clary  3:28  Yeah. So about the most creative and furthest thing from accounting that you could imagine. But yeah, so I decided that that’s the path I wanted to go on at an early age and kind of I had my whole life planned out for me from about age 13 on. That sounds like a CPA. Yeah, that is true. But maybe there were some underlying aspects of my personality, I should mention too. But ultimately, you know, I got into college, I decided that, you know, working nights working weekends working holidays, wasn’t exactly you know, the right thing if I wanted to raise a family and you know, have some sort of life outside of my profession. And so I kind of pivoted at that point in time to looking at different other careers, and that I was right in the midst of my first accounting class, which I actually really enjoyed, which, you know, I was it was an intro to accounting class, a lot of students around me hated it. And I was kind of looking around going, Hey, guys, this isn’t that hard, and it’s actually pretty fun. And so that’s kind of when the light went off, you know, for me that maybe this is something I should pursue, which, you know, to this day, I think is one of the most fortunate things that’s happened to me is that I went down that path because it’s allowed me to have the career that I’ve had so far and the career that I’ll have into the future. And so, that was my intro into accounting. Healthcare was almost the similars fortunate event where I started picking up some smaller health care practices, most of them actually started with dental practices. Just really found that I enjoyed the nuances of health care and really got along well with physician owners and, you know, started working with some larger groups, and you know, the nuances of those large groups versus a small practice. And so really just kind of dumb luck, like most of the things in my life, you know, kind of led me down the path to specializing in healthcare. And, again, I mean, just very fortunate that I get to work in that industry and advise that industry and I mean, I’ve just lots of great clients and great friendships with people in the healthcare industry. And so it’s, you know, it’s one that’s not going away anytime soon. So it adds job stability to.

Michael Zervas  5:41  You know there’s the accountant inside of you, it the job stability, but it’s interesting to me, I would push back a little bit on your characterization, that it’s dumb luck in doing these podcasts and, and talking with different people, I find that there’s a pattern of being open to gathering information from a myriad of sources, and being willing to chase that and follow that. And so that feels like the antithesis of dumb luck. But it may be instructive for all of us as we go forward to keep that mindset, right, and keep our eyes open for those opportunities that may exist.

Toby Clary  6:15  Yeah, absolutely. I mean, that’s, you know, I definitely simplified it down a little bit with a dumb luck comment. But for me, when I look at my career trajectory, and how I’ve ended up to be where I am now, I mean, there’s definitely a lot of hard work in there. And like you said, just being open and aware to what’s going on around you. And when doors open, you know, to know whether or not to, you know, go through them or go a different direction for sure.

Michael Zervas  6:41  So, you know, you said something earlier about, you know, you love the nuances, and I’m assuming some of the problem solving that comes along with managing healthcare businesses and delivering services to providers. But I’m curious to know, what part of it do you find onerous, don’t you like, I’m wondering if there’s some commonality from your perspective with some of our other guests and listeners who are enmeshed in this world, and struggle with different aspects?

Toby Clary  7:07  Yeah, for me, I think the hardest part with health care is some of the regulatory compliance that, you know, practices face all the time. Now being an accounting, I am used to regulatory compliance, obviously, with tax codes and accounting principles, and those but now also, we’re then adding healthcare, regulatory compliance, it’s a lot different than other industries. And so, you know, dealing with the change of regulatory compliance, you know, that’s always been a challenge for accounting, and also healthcare. So when you merge the two of them together, it becomes especially difficult. But if you look at it positively of, hey, here’s a challenge, how can we understand it, and then give great advice and help advise our clients, I mean, that that’s ultimately the most satisfying part of it as well. So while it’s challenging and onerous, it’s also provides the most opportunity to create value.

Michael Zervas  8:07  That’s probably true most things in our life, right? The ones that are hardest when we are able to surmount them, they’re the, they’re the most rewarding, but in that regulatory burden is especially heavy on smaller practices, right? I’m not saying the burden isn’t egregious for systems. But there’s a level where the regulatory reporting requirements are the same, right? Up to a certain point, and smaller businesses have less resources, expertise. And so is that one of the areas that you find is a blind spot for your clients? Or are there other areas that they have blind spots, or they struggle with in managing their business? Because a lot of the small to medium sized practices have the physicians themselves trying to wear two or three hats?

Toby Clary  8:56  Yeah, absolutely. I think as far as it being a blind spot, it absolutely is a blind spot. When I look at medical practices, a lot of these physicians that are owning these practices, and obviously, we’re not talking about the large healthcare systems, but for these independent medical practices out there, they’ve been highly trained and specialize to practice medicine, not necessarily to deal with the regulatory compliance to deal with cost monitoring, to running a business to running, you know, to managing HR. And a big part for us is the internal controls. You know, I’m speaking from the accountant side here, sure, but internal controls for medical practices, those are a big issue. And so, total controls are processes you have in place to help safeguard the financial assets of the practice of prevent employee theft, you know, to make sure that things are operating efficiently. And so for me, that’s a big blind spot to not only just understanding the regulations out there, but also understanding your own practice and what the numbers mean and how to safeguard it. Because I mean, physicians are good at practicing medicine, that does not mean that they’re innately able to run a business, not to say that they’re not able to run a business, we have lots of great physician owners, that are incredible business owners. However, that’s not what they’re trained to be. And so for me, regulatory management, and internal controls are huge blind spots for businesses for practices as they grow.

Michael Zervas  10:31  And you mentioned that there’s also other areas of the business that they may not have training, exposure or experience in running. And I’m curious to where you see those. You mentioned HR, but other others? Are there other areas that they independent of HR, or the internal financial controls that are so important? Where else do you see them needing help, or there isn’t a cross translational ability to the physician skills to this particular skill set required to run a decent sized business?

Toby Clary  11:04  Yeah, I think, number one, people skills are always very important, no matter what the industry, but especially in healthcare, and with physicians, being able to, you know, communicate well, their thoughts with their staff, I think is a area that not to just pick on healthcare, and not to pick on physicians, because I always think every business always needs to really dedicate time and resources to communication, you know, running a business is a relationship, it’s a relationship with your patients, it’s a relationship with your staff, and every relationship is built on strong communication. So that’s an area that I see that there’s a little bit of a weakness sometimes is effectively communicating between your team to make sure that the goals are met, HR, all of those, that’s a huge one. We’ve already talked about regulatory compliance, accounting, billing, I mean, understanding coding, you know, not yet fully understand. Proper coding, however, at least understand enough to know what the issues are to know where there are risks in down the road, to know where you could have issues from a cash flow standpoint, if things are coded incorrectly, and just having a general understanding, I think of a lot of things, they don’t have to specialize in any one of these, but really kind of just to be well rounded and robust at a number of different things other than just practicing medicine.

Michael Zervas  12:29 You know, it’s interesting to me, because one of the fundamental challenges that healthcare providers have is one, we don’t give them that general overview and information about the basic skills. And we also don’t teach them the difference between for instance, to talk about your communication with I think you’re spot on is there’s a difference between bedside manner and communicating with a patient, and different levels and types of communication for staff, depending on their role and function. And the others key stakeholder besides your staff and your patients or your partners. There’s a level of communication that’s different and sophisticated, that and all three of those groups have different communication needs and communication styles. I was wondering if you see that the same way that I just pontificated?

Toby Clary  13:15  Absolutely. I mean, it’s, you know, I mean, more medical practices have failed because of, you know, poor communication between partners. To me, when you brought up the partner aspect, I felt a little remiss, because that’s a huge issue with medical practices. And I mean, it’s, you know, let’s call a spade a spade, I mean, you know, in order to get through medical school and run a successful practice, sometimes physicians have large egos. And ultimately, you know, and that’s not a bad thing, you need it, I do not want that to come across as negative. But sometimes when you have that it does make communication difficult with other people who are your peers, that you may have differing viewpoints on things. And, you know, ultimately, it’s about bridging those gaps and finding the middle ground and, you know, finding the things you can agree on, rather than focusing on the things that you disagree on. And, and so I think communication between partners is absolutely paramount, because the tone of the practice comes from the owners down. And so when you have great communication between the owners, then that should filter down into communication with the staff communication with the patients and your right bedside communication with patients. A lot of physicians are really good at that. And so taking those and applying those other places as well, I think is really important to the success of practices.

Michael Zervas  14:40  You know, it’s interesting, too, that you’re making a great point about that. And we say having a big ego in the world, that’s considered a bad thing. But you kind of need to have a big ego to be willing to cut open someone’s body and do a hip replacement. There’s a little bit of hutzpah that you need to do this. And I don’t want my physician to be wringing their hands and worried that they’re going to make a mistake, but sometimes is, you know, that’s maladaptive in the business world. Right. And so there’s this ability to navigate that middle path, as you described, I think you’re spot on. And it leads me to a question for you, given the current environment, we’re talking about challenges that practices have and that providers haven’t owners have. But if we pull the camera back out, what changes do you see happening and challenges are happening as a result of this pandemic? And how are you seeing that maybe globally, or nationally, maybe globally is too big, but nationally, but also maybe drilling it down to? How does that affecting your clients? What do you see is happening out there?

Toby Clary  15:45  Yeah, I mean, the pandemic was really interesting, when, end of February, beginning of March, as this all started coming, really to the forefront of, you know, not only healthcare, but I mean, the entire nation and the world. practices were exposed with, you know, some of their weaknesses that they’ve gotten away from for a long time. I mean, we’ve always had historical challenges of consolidation of hospital groups, you know, downward pressure on reimbursement rates, upward pressure on costs, you know, shrinking margins of businesses? Well, you know, the one thing that’s been steady is that, hey, we’re always going to be able to practice medicine. You know, I know when the Affordable Care Act first came out, you know, and was being proposed, a lot of people thought this is the end of medicine as we now know it? Well, I mean, obviously, it did change medicine, but there are still practices, people are still practicing medicine, it wasn’t necessarily as negatively impactful as people initially thought it may be. Well, you know, now here we have this pandemic. And the one thing that we always knew that we had, which is we’re going to be able to practice medicine, that got taken away almost overnight for many, many practices, depending on where they’re located. And the regulations in those states, you know, counting their specialties,

And the individual specialties and where they deemed essential, or were they elective. And so all of a sudden, the one constant of we’re going to have patients, and we’re going to have reimbursements, and we’re going to have cash flow, the rug got pulled out from them. And so I think what it did was exposed that, you know, certain businesses didn’t have enough reserves on hand, in order to bridge the gap. Now, there was a lot of government interference in that to help bridge that. So that was a big issue of Oh, my gosh, how am I going to make payroll because of position being a physician group, and we drain all the profits out on a monthly basis for bonus calculations? And, you know, we just know that the coffers are going to get refilled. Well, that didn’t happen come April in May. And so not having enough cash reserves on hand, not having enough PPE on hand to deal with a situation like that was presented to us a lot of practices now are reevaluating. Okay, let’s have a plan for shutdown. What does it look like if we need to send some of our staff and have them be a remote workforce, you know, what IT infrastructure do we need? What IT controls? Do we need to make sure that everything is HIPAA compliant? I look at it from a I kind of used the TSA, which is not anything anyone wants to be, you know, referred to. But, you know, after 911, when that happened, there were massive changes that happened with the TSA and how we go about air travel. Now, I think the same thing is going to happen in the practice of medicine where the nuts and bolts are gonna stay the same. I mean, surgeons are still going to perform surgeries. Yeah, you know, radiologists are still going to be reading chart, that part’s not going to change. But I think what is going to change is, you know, some of the security and safeguard measures to make sure that if something large scale negative happens again, we’re not all caught on our back foot going. Wait a minute. Now what

Unknown Speaker  19:06  Encompass healthcare data solutions provides full suite it managed services and security solutions in order for companies to operate successfully in the current highly connected environment. Is your company chosen increase remote working capacity? Is your company been looking to transition more of its IT infrastructure to the cloud? The encompass team has helped numerous client partners adapt their business infrastructure to be more remote friendly while improving their security posture. Our team of information technology professionals will test your team with friendly phishing attempts and help you train your team to follow more secure behaviors to protect your business and reputation. with industry leading service level response times, encompasses ITT well keep your enterprise operating smoothly and in a position to minimize the inevitable attack. For more information, go to select information technologies And click the Learn More button to schedule a discovery call.

Michael Zervas  20:07  Do you see any other changes in the healthcare that are going to kind of be permanent? I take your point, surgeons are gonna do surgery and radiologists will do interpretations. But besides safeguards, do you see any other see changes that are happening?


Toby Clary  20:25  One of the ones that always is a concern to me. And for me looking at it, there may be a number of business owners out there who say, Hey, I don’t want to do this again. And yeah, hospital has been knocking on my door, I’ve been off because I like running an independent practice. But you know what, this has taught me that if something like this happens again, I don’t want to deal with it again. And so I’m just going to let the hospital system deal with it. And so I’m not sure if it’s if something like this is going to scare enough people to push them into joining a hospital group rather than running an independent practice. But it might I mean, I think, ultimately, I’m hoping that the practices are will continue to operate like they have continued just with more of a cautionary policy in place rather than just, you know, making bold assumptions that may not come true. And so for me, I look at it as I can’t predict the future. But I’m hopeful that, you know, people don’t just say, Hey, I don’t want to run a business anymore. As a small business owner myself, I believe in the strength of independent practices and small heads do. And so for me, I would hate to see this cause people to run to the safety of a large hospital group, but it might I’m not sure.

Michael Zervas  21:44  I agree with you on that. And I think that there could be some really negative consequences. If we see a significant fleeing from those independent practices, I think the independent practice serve a critical and important function within the healthcare ecosystem. I think they’re a governor, to some degree on pricing increases, I think they’re, that competition in the marketplace, I think drives better results. And I think the ability to have choice for the consumer, just from, hey, I like this surgeon better than that surgeon or I want to work it at with this person. And that person for whatever reasons, is critically important. And you know, you have I’m sure seen, and maybe you’ll confirm this question I have to that there’s been these contractions and and expansions of hospital footprints, gobbling up independent practices, and then my experience has been many times they don’t manage them as well as the independent practices do. And then they end up spitting them back out into the marketplace at some point in the future. Have you seen that as a as a function over your career? 

Toby Clary  22:53  Absolutely. I mean, I think, you know, when I, when I first started practicing, which was about 20 years ago, you know, that was when, you know, practices had decided they were kind of just coming out of the, hey, I do not want to be part of a large, you know, hospital group, I want to run an independent practice. And so, you know, it seemed that was the tail end of groups breaking off and starting a new. Yeah. And then it seemed, you know, when, you know, I don’t know how many years ago, you know, call it 10 years ago, maybe all of a sudden, we started seeing practices start to get gobbled up again. And it’s, and it is a cyclical nature. And it as you know, from my understanding of the industry, it’s been like that for a little while, but it definitely, I’m not seeing as many more practices splitting off anymore that used to and so it seems like now once they’re in the system, I’m not sure if they’re staying in the system, or we’re just still waiting to see, you know, that cycle renew again, but I’m not many groups kind of decide, hey, we’re gonna do this on our own and break off from the hospital group. Yet not to say it won’t happen in the future, you brought up a lot of great points about, you know, some of the efficiencies of running the practice. And, you know, part of it goes back to sometimes, you know, these Doc’s want to be in control of their own destiny, you know, there’s, there’s benefits of, you know, not running a business, but there are also a lot of benefits of running a business. And so, I’m hoping that, you know, it’s just a continual cycle. And it’s not once you’re in the hospital system, you’re always in the hospital system, but I’m not sure on that one anymore.

Michael Zervas  24:29  You know, you raise a good point, Toby, and you making me think, and I’m looking back and realizing that I’ve seen a lot of acquisition. But you’re right, I haven’t seen people’s being spit back out my, I’ve been in healthcare for now close to 30 years. And I remember a time when they were acquired and then people grew tired of a lack of independence to practice and they came back out and split back off and formed groups. And so it’s an interesting point to see over time, if in fact, this is the new norm that people are staying put, because of all the uncertainty, whether it’s regulatory pandemics or this downward pressure on reimbursement, and it’s just not worth it.

You raise a great point, it kind of makes me wonder, too, is I’ve always had this conundrum and I wanted to get your take on it, of why we don’t spend any time when they’re when physicians are in medical school, giving them any primers on business. And maybe you have a thought about whether that’s a good idea, or it’s crazy, but we expect them to jump out and be generalists in all these different areas that we’ve had them focus and we haven’t given them any exposure until their feet are on the ground. And they’re have to get running and make decisions because they’re docs. And they’re conscientious people, they’re going to try like heck, so they’re not going to shirk from the job, but we haven’t given them very many tools to do it.


Toby Clary  25:55  Yeah, to me, you couldn’t be more Right. I mean, it’s and and I understand that, you know, the way education is now, I mean, there’s so much information that they have to take in to practice medicine, I mean, that first and foremost, that has to be their primary focus, right, but but losing out on any sort of other general curriculum like business management classes, HR, I mean, even understanding how payroll works and accounting and to be able to look at a profit and loss or a balance sheet of a practice and just not even to be able to dissect it, but just to even know what you’re looking at. And then I mean, honestly, I think every person in medicine and and if you’re going to have any sort of management, well, you have to, you know, classes in psychology, I think are important. So I think, yeah, I think there’s a lot that’s lacking in the edge in the curriculum out there to make somebody not only a successful physician, but also a successful business owner, someone who can, you know, just even even if they’re internal of, you know, some other system to be able to look and understand, you know, profitability and ratios, and what what the reimbursements mean, and yeah, and those sort of things, I think, really just get lost in the, in the education system. And I think it’s a disservice to students, you know, in med school, and not to pivot away from just, you know, physicians, but even on the dental side of things where, yeah, a lot of times, you know, dentists are coming out of school in between their student loan debt, and then they start a practice, they buy real estate, and their $2 million in debt before they’ve even earned a single dollar, you know, and then and they’re expected to, everything will be fine, and they have no training on how to run a business. And so, you know, it’s not just, you know, med school, it’s, I mean, they’re across the board, I think there’s a disservice. And you know, I love when I find a physician, that has an understanding of financials, because, it’s so much more of an in depth conversation that we can have when we’re looking at things and talking through things. Because ultimately, I mean, it’s just, that allows me to do my job even better if they have a baseline knowledge of what I’m talking about. And so, you know, part of my job is education. I mean, I, you know, I teach for the Colorado Society of CPAs. But more than that, I’m an educator for my clients and trying to educate them on what to look for and what they need to be paying attention to. You know.

Michael Zervas  28:35  It’s interesting, because that’s the word that kept jumping into my mind is that, you know, you and your firm are really teaching and guiding and educating your clients along this journey and helping them navigate. And it’s interesting to me that we’re doing that work, I do some of that work, when I’m consulting or trying to turn around a system, the first thing is to start to get a gauge of where the knowledge level is of the various key leadership and your mention of organizational psychology and the ability to understand how to be a leader and an effective leader. It’s a complicated path to navigate. And I’m, I’m guessing that’s part of what you like about it is those challenges?

Toby Clary  29:18  Yeah, absolutely. I mean, to me, the dirty little secret of my job is that, you know, I don’t like sitting here for 12 hours a day reviewing tax returns, I mean, that’s not where, you know, I I get my enjoyment. You know, the enjoyment is doing exactly what you just said, which is, you know, I love the you know, getting in there and working hand in hand with groups and advising them because, I mean, yeah, that that’s where you see results and you know, accounting and, you know, the CPA world so much of it is reactive to Okay, here’s what you did last year. Here’s how we’re going to report it to the government, but that’s not the fun part. The fun part is putting plans in place. You know, implementing change and seeing, you know, the success on the back end is really where the true enjoyment of what we do, and that’s where it comes from.

Unknown Speaker  30:12  Encompass healthcare data solution focuses on collecting the maximum from the revenue cycle, the revenue cycle management team regularly performs top 10%. outsourced billing companies with clean claims rate of 90.05% to zero paid an hourly rate of point 01 5% and average days in AR of less than 24 days. Your practice could go back to focusing on providing quality health care to your patients without the nagging concern of leaving real dollars on the table. encompasses revenue cycle management solution provides unparalleled visibility and control to your revenues by providing comprehensive dashboard and reporting system. The same reporting and dashboard system that the encompass team uses to manage itself. Like most other revenue cycle vendors, and compass only gets paid on net collections. Unlike other companies, they have a highly developed and new denials management system, it helps to ensure that your practice gets every penny that you’ve earned. For more information, go to and select revenue cycle management, and click the Learn More button to schedule your discovery call today.

Michael Zervas  31:25  I guess it leads to another the big question that a lot of our listeners would want to know about his and I know you’ve been this region, you’ve been a leading voice on trying to distill and teach a lot of people in the community about what’s going to happen with these PPP loans you have a sense of a Gestalt of where you think the thinking is, and what’s going to happen or a timeframe? Or is everything still as nebulous as it was two months ago?

Toby Clary  31:51  So the answer to everything you just said is yes. Wait a second, man. So yeah, I mean, so here’s where we stand right now, here. And let me tell you, where we stand where the current thinking is, and what I think is gonna end up ultimately happening. So perfect. Yeah, ultimately, I mean, when the cares Act came out, I mean, we all had to immediately drop what we’re doing. I mean, not only us in the accounting world, but obviously everybody in health care of, what does this mean? What does this look like? I mean, it was a robust piece of legislation that came out very quickly. Well, there were a lot of holes in it initially. I mean, when we read the initial, I mean, and there’s still a lot of unknowns and a lot of holes that still haven’t been dealt with. But we have a pretty good idea of where we stand right now. So right now, almost every loan is still on the books, I’m not aware of a single loan that has been forgiven by the SBA, yet banks are now just starting to take applications for forgiveness. But your listeners really should, you know, pump the brakes on asking for forgiveness quite yet. And I’ll tell you why. When the loans first came out, they came out with an eight week period that you had to use the funds, which that created a lot of confusion for people, because, hey, we had two and a half months, we got to use two and a half months of payroll, but now we have to use them in an eight week period, our practices aren’t open yet, how are we going to pay these people are practicing open when the practice opens up? You know, that’s when we’re going to need the money, but we’re not going to have time to do it. And it created just a lot of headaches, and a lot of kind of stressful hand wringing moments. Well, they came out said, Wait a minute, no, we understand we’re going to change it to 24 weeks for you to use the funds. So ultimately, now, practices have been given 24 weeks to use this money for payroll for rent for interest payments, for utilities, transportation, a number of things like that. And they only use two and a half months worth of their average payroll to qualify for it. So that means assuming that the practice basically didn’t shut their doors or go down to less than 50% for this entire 24 week period, chances are they have enough expenses for that loan to be fully forgiven. So we went from thinking that these loans that we’re going to have trouble getting our clients to have their loans fully forgiven, because they weren’t going to have enough expenses, to really that not being the issue at all, because we went from a eight week period to essentially a five month period to use the funds. So right. So the thought is that they’re going to be fully forgiven at this point in time. Now, the question is, when are they going to be forgiven? When the cares Act came out? And not only when are they going to be forgiven, but what are the tax implications of that? Because the Cares Act came out. Written in the cares act. It said, the forgiveness of the debt, once it becomes forgiven is not taxable income, which was great to us in the accounting world because that meant Hey, you know, normally when you have debt forgiven, that becomes income to a practice? Well, the cares act the way it was written specifically for bid that to be considered taxable income. And so we thought, great, we’re going to be able to deduct the expenses. When the money gets forgiven. It’s not going to be taxable income. It’s kind of the best of both worlds. However, the IRS like the IRS generally does came back and said, pause a minute, what’s happening, what’s going to happen is yes, the forgiveness of debt is not taxable income. However, any expenses that you use the money on, you can’t deduct, because you cannot deduct expenses that are related to tax free income. And I know I got a little deep in the tax code there. But ultimately, what they said was, yeah, we’re not going to make you treat the forgiveness as income, but we’re not going to let you use the expenses as a deduction. And so that puts us right back into the same place of, well, if it’s going to be income. If we can’t deduct the expenses, then essentially, it becomes income. Now, both sides of the aisle came out, when the IRS made that ruling a few months ago, both sides of the aisle came out and said, that is not what we intended. Republicans and Democrats alike, which not much they agree on these days. But they both agreed, that was not how they intended the law to work. The IRS came back and said, Well, sorry, but that’s how the tax laws written if you want to change it, then you need to pass legislation to change it. So both sides of the aisle came back and said, Fine, we’ll do that we’ll deal with it in our next stimulus package. Well, you know, as the list that Yeah, we know that that hasn’t happened. So as of right now we stand, you know, our understanding is that expensive used will not be allowed as a deduction on the practice of tax returns, if they had those expenses forgiven through the PPP.

Michael Zervas 36:53  That could be a that’s a big blow, right? I

Toby Clary  36:55  I mean, it’s a big blow. Yeah. And that’s, we thought we thought of this as a lifeline for businesses, which was absolutely, and a lot of practices, you know, they really relied on on the PPP funds to keep their employees on the payroll, which is what the intent was. But now there’s this kind of freight train coming down the road of Oh, my gosh, we’re gonna have taxable income because of this. And then there’s also, you know, that dovetails into HHS funds with the cares Act, the HHS funds that came out that were providing to groups that provided service that were billing for Medicare, there are requirements on that, that the forgiveness of debt now impacts, some of those HHS funds, and the reporting and repayment of those and so it’s just a mess right now. Our hope is that somehow, some way they still come together and say, no, this is not taxable income, the expenses are fully deductible. Really, this is just a tax free gift from the government. But that’s not where we currently stand. So we’re telling our groups hold off on submitting for forgiveness right now. They keep talking about simplifying the forgiveness application. And are we right now they SBA just came out and simplified for loans under 50,000. But a lot of medical practices have loans far exceeding 50,000. So ultimately, you know, we’re telling him to hold off, because the other thing is, is until that debt is legally forgiven. It stays as a liability on your books, which you think is a negative. But if you think about it, if you don’t have it forgiven legally until 2021, then in theory, you’re not going to pick up that Phantom income until 2021. Now, the IRS may close that loophole at some point. But as it stands right now, it seems like that is a a planning strategy right now of Hey, maybe let’s not submit for forgiveness in 2020. Let’s put that tax can down the road to next year and submit for forgiveness in 2021, which you have the ability to do,

Michael Zervas  39:04  and park it on the balance sheet as the liability. Hmm. Interesting. Yeah, that makes a lot of sense. I know that in reading some of the stuff that you’ve been putting out, it’s been it’s a snafu. Right situation normal all filed up. I mean, if you don’t, I’m reminded of my grandmother’s admonition to me that no good deed goes unpunished. Right. And so the intent was to help us navigate through this on this black swan event, right? And instead, is always we take our best guess at what the real outcome is going to be even when the cares act is passed. It’s never done right. I remember the same thing happened with the adoption of electronic medical records years ago, and that would became you know, they drove to do that. And there was two schools of thought one was, wait until the last possible moment to do it because you’ll have more clarity and the other was do it as fast as possible and get the money. Now and then use that money and it feels like we’re in that same spot where there’s no clarity. So and in all business hates uncertainty, it’s frustrating at best.

Toby Clary 40:15 Yes, absolutely. You don’t want to be the first one to ask for forgiveness for this. The first one through the door gets shot. I am with you for the latter of your school of thought, let’s hold off a little bit and see what happens. Worse case we apply for forgiveness in December unless they are trying to sell their practice because right now the SBA says if you are trying to sell your business then you have to escrow the sales proceeds w\for whatever the PPP is until it is forgiven. That is the only business I am telling to ask for forgiveness.

Michael Zervas 41:12 That’s a great point. So, Toby, I just looked at the clock and I kept you longer than I promised. Thank you for giving our listeners some very useful information, here’s what I would like to ask, Would you be willing to come back again at some point. One thing we didn’t get to talk about is consolidation for people that are trying to sell their business in addition to the information you gave us about the loans themselves. Are you willing to come back sometime.

Toby Clary 42:10 No, I always enjoy talking about this stuff. My family doesn’t like to listen to it, so anytime there is a willing audience then I am all about it.

Michael Zervas 42:28 Well thank you Toby, I want to thank you for donating your time today. If you want more information about Toby or his firm. There are two ways you can reach him. One is through his firm or you can call them at 970-223-2727. They have a great team. Toby has a wealth of knowledge around healthcare and running businesses. I strongly encourage you to reach out to them. Thank you Toby.

Toby Clary 43:05 Absolutely, thank you, I appreciate you having me on.

To Listen to the Episode Visit The Healthcare Huddle.

Back to News