For decades, business owners have fixated on reducing taxes and have even been trained by tax accountants to decrease profits in order to save on taxes, but we’d like to challenge you to a new perspective! One that allows you to examine the true well-being of your practice. One that focuses on the value of your practice more than paying less taxes.

On the surface, managerial accounting versus tax accounting may not seem relevant to your practice. But let’s examine them both further so you can see how the two perspectives are different – and why they are both very important for your practice!

Tax Accounting

• Transactions are recorded for the sole purpose of preparing tax returns based on IRS guidelines and for the organization of the tax forms. 
• Cash-based accounting method is the most common method that taxes are reported with. This means transactions are recorded when cash is exchanged.
• Focuses on minimizing profits! Tax accountants work very hard to lessen the tax burden on a practice owner, which translates to lowering profits.
• There are several different common tax strategies we see in veterinary practices. For example, recording discretionary expenses above market rent paid to yourself, overpaying yourself or family members, or buying a lot of capital equipment at year-end are all tactics used to save tax dollars.

Tax accounting is very important, make no mistake, but tax accounting has very little to do with helping you manage the operations (and profitability!) of your practice.

Managerial Accounting 

• Records numbers and data in a way to measure, analyze, interpret, and communicate information to owners and managers regarding the practice’s operations for the purpose of achieving the practice’s goals. That’s a long-winded way of saying this method helps you manage your practice; hence the name, “managerial.”
• Accrual-based accounting method is used when entering data into your books. This means transactions are recorded on the date they are incurred, which allows revenue to be matched with the expenses required to generate that revenue.
• Is primarily for internal reporting purposes to help practice owners and managers identify opportunities and to isolate efficiency issues that reduce profits.
• Is important when determining a value or purchase price for the practice.

Here is a great example to illustrate the two different perspectives:

From a tax point of view, if you have a $1,000 tax deduction or a “perk” item in your annual expenses (for example let’s say that when you purchased a few new computers for the practice, you also included one for your child to take to college), the tax on that amount would be about 25%-45%, depending on your tax bracket. So, the amount you would save in taxes by taking that $1,000 deduction (which would include a personal expense in the business that would be hard to carve out later) would be around $250-$450.

Let's look at this same example from a managerial standpoint. When determining the value of a practice, every dollar that makes it to the bottom line on the profit and loss statement will increase a practice’s value. Currently, we see an average capitalization rate of about 25% - 14%, as a multiple, that’s about 4-7. So, depending on the specific capitalization rate for your practice, the value will increase by about $4-$7 dollars. So, if you did not take that $1,000 deduction (or include any personal expenses in the practice), the $250 - $450 tax dollars you paid would become an excellent investment, returning $4,000 - $7,000 in increased practice value!

Even if you have owned your practice for 20 years, or you are starting up a brand-new practice, it is important as a business owner to focus on the value of your practice. Life happens and you never know if or when you might be faced with a distressed sale, a situation where you or your family may be forced to sell the practice. 

We challenge you to a new way of thinking. Show some profits on the tax return! Yes, your tax burden might increase, but it will also increase practice value by much more. Start now, it’s never too late!