GO ON THE OFFENSIVE!

A Game Plan for Wealth Accumulation

By Steven L. Line, PT

The day I opened my private practice, I was experiencing many varying emotions; I was anxious, confused, overwhelmed, happy, and scared as I started my journey.

However, I knew with 100% certainty that I wanted two things: to be financially independent and to accumulate wealth. I thoroughly enjoyed studying the sciences, biology, anatomy, and biomechanics and I really enjoyed the relationships and connecting with people. In short, I loved working with patients and seeing their progress and being a part of their journey in recovery, but my primary “why” for starting a physical therapy practice was financial security for me and my family. I was not born privileged and grew up in abject poverty in a culture of deprivation that ignited a fire in my spirit for capitalism and abundance. I was driven to escape poverty with every fiber of my being.

When I was growing up, my parents each had two, and sometimes three, jobs each in order to make the household work. Financial stress was the leading reason for all the discord in the household. For those old enough to recall, inflation and Interest rates were very high in the late 70s and through the 80s, and farming was at its all-time low economically. Forced foreclosures of small family farms were occurring at an alarming rate followed by the Savings and Loan Crisis throughout the mid to late 80s. Times were extremely hard economically and my brother was first one in our family to attend college, so there was no extra money when I was in high school. I was required to pay for my own clothes, sports gear, Air Jordans, and any recreational activities.

My parents were too proud to accept assistance or help from anyone. We qualified for several welfare programs, but Mom and Dad were always determined to work through their problems on their own and eventually, in the late 80s things appeared as if they were starting to turn around! During one of our few prosperous years where farm yields were good, we decided to celebrate with a family vacation. Those plans were thwarted almost immediately when the IRS sent my family a letter demanding a recoup of taxes from previous years. My parents did their best to put up a fight and prove that they had covered their tax bill; however, it began costing them more over time as they hired an accountant and spent more time working to resolve the issue. Eventually, instead of wasting any more money and time, my dad sent the IRS a $660 check ($1,600 value in 2021), and that put an end to our vacation.

It was repeated disappointing moments like these in conjunction with my father’s common-sense financial mentoring that prepared me to responsibly view money as a tool or a piece of equipment that was necessary. He viewed money as an asset that could leverage power for progress or, if mismanaged, can be a destructive force in and out of one’s life. My father passed away in 2012, but I can still recall our many drives to and from town to our farm, where he would teach, coach, and lead me in the principles of life, specifically God, family, and money. Born from these teachings, was a plan to wealth accumulation and to escape poverty. Since my family was very conservative, frugal, and never achieved financial freedom, I knew their defensive “play it safe” strategies would not help me realize my dream of becoming wealthy. However, I felt helpless being armed with a “read and react” style of defense protecting my money, when in reality, I didn’t have any money in the first place! Thus, I felt I needed a proactive approach—an offensive strategy—that could be a lucrative income generator as well as the best defense in creating a hedge, for protection.

Creating a Financial Strategy

I tend to be simplistic and prefer fundamentals to complexity, so I designed a game plan that was strategically simple with very few steps. I settled on a basic three-point financial game plan: income, accumulation, and protection that enabled me to direct and be in greater control of my goals.

Interestingly, I discovered that this three-tier pyramid model was apparently just a simplified version of a five-tiered pyramid that financial planners use that includes cash flow, risk management, investing, tax planning, and estate planning. Whether you choose a one, three or forty step game plan, what really matters is if you actually follow the steps.

Income: I needed to ensure I was a high earner first above all things. My plan wouldn’t work if I merely was above average or doing better than my neighbor. I figured that I needed at least 5x what the average physical therapist made. The highest I could stretch my annual earnings would be the deciding factor if I would get to my goal or not and the only way to have full control of my destiny was to own my own practice. Merely owning a practice doesn’t guarantee wealth, just as obtaining a college degree doesn’t guarantee a good job. Your first step is to grow your practices rapidly. Without an aggressive growth strategy, a practice owner can only receive the level of compensation commiserate with their size of business. That is why Jamie Dimon, CEO of JP Morgan Chase, possesses much greater wealth than Steven Line, CEO of Columbus Physical Therapy, PC! The bigger the business is, the more money you will make.

The legal business structure is an important piece of the income formula, as each structure you choose will have pros and cons to the taxation of your income. Flow through models such as S-corp, typically are the most heavily favored in private practice, as these structures allow for a single taxation of the earnings, which occurs on the shareholders’ personal tax return. Furthermore, keeping compensation in balance between owner’s payroll and distributions, they can realize the tax advantages of shareholder dividend income by reducing FICA liabilities.

The manner and method in which a practice owner takes their compensation is another perk of business ownership. “Owners should be sure to include themselves on payroll so that they can take full advantage of any retirement plans also offered to employees,” said Dave Hunke, CFP with Sagepoint Financial in Omaha, Nebraska. “This is one key area many practice owners skip trying to keep costs low, but unfortunately they lose out on many opportunities to accrue wealth in a portfolio.”

I personally want a hybrid of diversified income sources. Of particular interest are passive streams or investments that are seemingly automated, such as the retirement deduction. My retirement plan statement arrives, and I am stunned by how much I have grown my portfolio through compounding, and I never even think about it.

Accumulation

There has been a few phases in my career when I started accumulating some serious money, one of which has been during growth phases of the company, as I had previously noted that the bigger your business, the more money you will make. Another phase has been creating multiple income streams and re-investing my earnings. There have been times when I actually had more cash than our company had, so I loaned (invested) money into our company to give it an injection of cash. I created a short-term promissory note with an interest rate, so I began making money not only on the profits generated by the company, but also on the money I invested into the company as an operating note.

Some people choose to take their distributions and go to Hawaii, some choose to buy new vehicles. There is absolutely nothing wrong with those fun choices, but my goal, if you recall, was wealth creation and to become financially independent. So, I choose to buy appreciable assets as often as I possibly can such as securities and real estate. Taking draws and investing my excess basis and using it to purchase real estate was something I have done aggressively over the past 10 years. Taking money that has been taxed already and reinvesting into an asset that will create another source of income has been great for quickly accumulating wealth and increasing my net worth. Commercial real estate provides unique advantages as a growth and income investment considering the asset appreciates at the time you decide to sell, and you get to receive monthly payments cash flowing the bank note, insurance, and taxes. In addition, it provides yet another business entity you can create in a real estate LLC, and then maximize the benefits realized from not only being the owner of a physical therapy clinic, but also now managing partner or member (depending on your structure) of another appreciable business that gets you closer to financial freedom. Starting other businesses “side hustles” is another great way to accumulate your wealth. I recently started my third company, Sheldonville Publishing, which holds my published work, another source of passive income, and, as I heard Matthew McConaughey refer to it, “mailbox money” because every time you go to your mailbox there is a check inside.

Just as a coach needs many offensive weapons on a sports team to win, you need to consider multiple income streams if your goal is to accumulate wealth and be financially free.

Protection

Once you make the big time and have a lot of money, then what could possibly go wrong, right? Does anyone remember Enron or Lehman Brothers? The bigger your company and more assets and resources you have, the greater your chance of success and survival; however, as in the case of 2008 financial crisis, no one is too big to fail.

Immediately following the dust settling from the collapse, my wife and I had lost over half of our net worth. What saved us? Answer: we didn’t get heavily leveraged and stuck with the financial plan I set out years earlier. Our focus was always on steps 1 and 2 of this plan, and that alone organically executed step 3: Protection. Our drive to create the highest top-line number personally and minimize the debits or liabilities kept us in favorable cash flow positions, which allowed our liquidity to carry us through tough times.

Insurance is a vital component of your protection plan. Insurance was something my family used out of legal obligation, not as a means to protect their assets. Once I got into the business world, I quickly found that my debt load would crush my family if I were to perish unexpectedly. Life insurance is an absolute must and, because it’s cheap, there is no excuse to irresponsibly saddle your family with a burden when you could have handled it with some premiums. Beyond life, I have our entire lineup of insurances for the simple fact that my asset portfolio and my net worth is completely exposed without a coverage. Life, disability, business income, liabilities: to include premise liability on the facilities, professional liability on our providers, and ensured that all of our assets are covered to the extent that replacement value would create an undue hardship. Insurance is the final line of defense to protect your nest egg beyond legal structures set in place prior (i.e., limited liability comp, S and C corp, etc.).

Currently, using the correct legal organizational structure is paramount along with ensuring you understand the limits of its protection afforded you by the courts. Whatever you choose to do, learn and understand your risks, rights, and responsibilities associated with every one of these decisions.

Tax Management

Of all of the defensive plays you could use, none is more important to keep you in business, protect your family, and keep you out of jail than tax management. Tax management and tax planning for most people is gathering documents, putting them in a box, and dropping them off at the CPA office.

Refusing to enhance their business IQ, improve their organization skills, and be accountable has cost many business owners in penalties and left them without enough liquidity to cover their tax burden. This is a nightmarish scenario that can all simply be eliminated if all owners followed the same practice that they used in physical therapy school: If you know you need 900 points to achieve an A grade in a class and you are currently sitting at 800 with only two tests left in the year each worth a total of 100 points each, what is your strategy? What do you need to score on each test minimally to achieve your semester A grade? What is humorous is nearly all physical therapy students are intense high achievers and know exactly what I am talking about in this scenario, yet they run their businesses by the seat of their pants! The absolute first step to tax management and keeping yourself OUT of trouble with the IRS is to get organized. Keep orderly records, learn by asking questions and then keep on top of everything your business is responsible for by creating systems.

When I started following this three-point plan years ago, I immediately got streamlined with organization. Files had to be orderly and converted to software as soon as feasible. Weekly statistics and a regimented cash and bills reporting system we self-created kept us extremely clean and orderly. Bills are done weekly without exception. Payroll is direct deposit. Tax filings are all electronic and done on or before the due date. Software updates are routinely executed to ensure the most current tax tables from the IRS are installed and the correct withholdings are taken from payroll and the company is paying the proper amount of payroll tax for unemployment, social security, Medicare, fed withholding, state withholding, etc.

The principal owners in our practice are included in weekly communications, reports, with a detailed list of liabilities for the week and a cash position forecast. We also participate in quarterly meetings with our company accounting firms to project our federal and state tax liability, which allow us to see if we are creating a surplus or will fall short on our tax bill. Depending on where those projections fall, we can increase our tax payment by taking a bonus and using it to cover our tax obligation or taking that same bonus as “fun money.” However, if we weren’t planners and weren’t organized, how would we know what to do?

I don’t necessarily relish the thought of tax planning or having tax meetings. But I do enjoy looking at my personal capital account and my brokerage statements as well as sleeping peacefully at night and relaxing at home with my family knowing I have everything under control instead of worried that I will be prosecuted on tax law violations.

Questions to Ask in the Quest to Build Wealth

Jordan Mueller, CPA with Schmeits, Mueller & Martinsen, P.C., advises practice owners to ask the following when it comes to accumulating wealth:

1. Am I spending money on something just to save taxes or is the asset or item going to allow me to generate more income? The focus should be on purchasing assets/items that either make your job easier and/or allow you to generate more future income. Spending money just to pay less tax is usually not a winning strategy.
2. Am I setting myself up in a good position for retirement? While increasing a practice is a good asset for the future, we advocate having a separate retirement plan in place in the event of unforeseen circumstances with the practice (like an inability to find a buyer). This provides two benefits: diversified assets and also tax deductions for the retirement contributions (while still technically holding onto the cash).
3. Is the structure of my practice the most tax efficient for my goals? There are many types of taxable entities (C-Corp, S-Corp, LLC, Sole Proprietor) and each has their advantages and disadvantages. You want to make sure the structure you choose fits your goals best for tax management and future firm needs.
4. Are there tax strategies I can employ to retain key employees? Perhaps a deferred compensation plan or, depending on size, employee stock ownership plan (ESOP), can be utilized to try to retain key employees and staff. For smaller practices, offering a retirement plan with good matching contributions or performance-based bonuses tied to income generation may also help keep key employees.

Establish Your Process

Summarily, I have learned that by avoiding painful things in life I just guaranteed that the outcome, regardless of how poor, just became worse exponentially. As a practice owner, you need to face these issues, such as tax management, directly and responsibly. Once you understand the process and have a routine in place, it isn’t so bad because you know what to expect. Consider using the legal structures and shelters such as IRAs as much as possible to reduce your tax bill. Use Roth IRAs and business entity ownership such as real estate for additional depreciations and deductions to help reduce your tax burden, and thus increase your income, asset value and net worth.

Most simply and most importantly, if you don’t have a financial plan, hire an accountant, an attorney, and a very good insurance agent and get your offensive game plan ready for action!

References:

¹Kramer L. How the Great Inflation of the 1970s Happened. Investopedia. https://www.investopedia.com/articles/economics/09/1970s-great-inflation.asp. Published May 12, 2021.

²Lawton K. Taking a look back at the 1980s farm crisis and its impacts. Farm Progress. https://www.farmprogress.com/marketing/taking-look-back-1980s-farm-crisis-and-its-impacts. Published August 22, 2016.

³Amadeo K. Savings and Loan Crisis Explained. The Balance. https://www.thebalance.com/savings-and-loans-crisis-causes-cost-3306035. Published February 27, 2021.

⁴Saving.org. Resources and Calculators. https://www.saving.org/. Accessed August 13, 2021.

⁵Cross D. On the Road from $0 to a Million, This Simple Pyramid is Your Map; What Level Are You On? https://www.moneyunder30.com/financial-planning-pyramid-11294. Published July 31, 2019.

⁶Wikipedia. Jamie Dimon. https://en.wikipedia.org/wiki/Jamie_Dimon. Accessed August 13, 2021.

⁷Line SL. The Feel Good Experience. Columbus, NE: Sheldonville Publishing. https://www.columbusphysicaltherapy.com/the-feel-good-experience/.

⁸Wikipedia. Enron. https://en.wikipedia.org/wiki/Enron. Accessed August 13, 2021.

⁹Lioudis N. The Collapse of Lehman Brothers: A Case Study. Investopedia. https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp. Updated January 30, 2021.

¹⁰Amadeo K. 2008 Financial Crisis: Causes, Costs, Could It Reoccur. The Balance. https://www.thebalance.com/2008-financial-crisis-3305679. Published October 30, 2020.

Steven L. Line, PT, is a PPS member and President of Columbus Physical Therapy, P.C. He can be reached at cptsl@columbusphysicaltherapy.com.

Disclaimer: I am not a certified financial planner (CFP), an accountant, or an attorney, and am therefore unqualified as an expert in financial planning, tax management practices, or wealth accumulation. I have, however, invested a lot of money and time in leadership and business training and development firms. I have also personally created wealth, protected wealth, started multiple businesses, and have many decades of financial education from the University of “Hard Knocks.” I have failed and learned many times. Please receive this information at your own discretion and please consult your tax, financial, or legal professional as needed.