How do I structure a practice for tax efficiency?
The most tax-efficient practice structure typically involves an S corporation or PLLC for the clinical practice, a separate LLC for real estate, an MSO for non-clinical services, and a defined benefit retirement plan, optimized to preserve QBI and balance payroll tax exposure.
Definition
Tax-efficient practice structure is the legal entity organization and compensation strategy that minimizes federal, state, and payroll taxes within compliance constraints (Stark Law, Anti-Kickback, state corporate practice rules).
The detail
A typical multi-entity tax structure for a healthcare practice includes four components. First, the clinical practice entity (PC, PLLC, or S corp depending on state corporate practice of medicine rules) earns clinical revenue. S corp election allows shareholder-employees to take a portion as W-2 wages and the remainder as distributions, avoiding payroll tax on the distribution portion (subject to reasonable compensation requirements). Second, a separate LLC owns the practice real estate and leases to the practice at fair market value, generating non-SSTB rental income that may qualify for QBI deduction even when clinical income is phased out. Third, a Management Services Organization (MSO) can provide non-clinical services (admin, IT, scheduling) to the practice, potentially generating non-SSTB income subject to fair market value pricing rules. Fourth, retirement plans (401(k) plus Cash Balance) shelter $250K to $400K+ per partner. Each layer requires legal substance, fair market value pricing, and Stark Law compliance for any inter-entity arrangements involving designated health services.
S corporation election can reduce self-employment tax exposure on distributions above reasonable compensation.
Source: IRS S Corporation
Stark Law requires fair market value documentation for inter-entity arrangements involving designated health services.
Source: CMS Stark Law
MSO structures must avoid fee-splitting violations under state law and federal Anti-Kickback Statute.
Source: OIG Anti-Kickback Statute
What this means for clinic owners
From Sorso
The cheapest tax structure on paper is often the most expensive after legal exposure. Any structure that involves multiple entities and inter-entity payments needs Stark and Anti-Kickback review by healthcare counsel, not just tax planning. Cutting corners here is how practices end up paying back years of profits.
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What tax deductions are available to medical practices?
Medical practices can deduct ordinary business expenses including staff wages, rent, equipment depreciation, supplies, malpractice insurance, CME, retirement plan contributions, and qualified business income (QBI) where eligible.
What is Section 179 for medical equipment?
Section 179 lets medical practices immediately expense up to $2.5M of qualifying equipment placed in service in the tax year (for tax years beginning after Dec 31, 2024, per OBBBA — Public Law 119-21, signed July 4, 2025; $2.56M for tax year 2026 per Rev. Proc. 2025-32), instead of depreciating it over multiple years.
What retirement plans work best for clinic owners?
The best retirement plans for clinic owners are Solo 401(k) and SEP-IRA for solo practices ($70,000 to $77,500 contribution limits for 2025), and 401(k) plus Cash Balance Plan combinations for partnerships, which can shelter $250,000 to $400,000+ per partner annually.
What is the QBI deduction for healthcare?
The Section 199A Qualified Business Income (QBI) deduction allows a 20 percent deduction on qualified business income from pass-through entities, but it phases out for healthcare specified service trades or businesses (SSTB) above income thresholds ($403,500 MFJ for 2026 per IRS Rev. Proc. 2025-32).
Are healthcare practices specified service trades or businesses (SSTB)?
Yes. Under IRC Section 199A, the field of health is explicitly listed as an SSTB, including services performed by physicians, dentists, nurses, therapists, and similar healthcare professionals. SSTB status restricts the QBI deduction above income thresholds.
What is the difference between accrual and cash accounting for clinics?
Cash accounting recognizes revenue when payment is received and expenses when paid; accrual accounting recognizes revenue when services are performed and expenses when incurred. Most clinics under $30M revenue can use cash; larger groups and those preparing for sale typically need accrual.
What records do I need to keep for an IRS audit?
Medical practices should keep complete tax records for at least 3 years (general statute of limitations), 6 years for substantial understatements, and indefinitely for assets, retirement plans, and HIPAA-related documentation.
What is a fair cap rate when buying a medical office building in 2026?
Medical office building (MOB) cap rates in 2026 typically run in the high-6% to low-8% range for stabilized, multi-tenant suburban assets, with single-tenant credit-grade health-system leases trading tighter and smaller secondary-market assets trading wider. Pricing has reset upward from the 2021 trough as interest rates normalized, but MOBs still trade tighter than most other commercial real estate sectors.
How should I structure LLCs for multi-location healthcare practices?
Most multi-location healthcare practices use a holding-company structure: a parent LLC (often an S-corp for tax) owns separate per-location operating LLCs and a separate real estate LLC for any owned buildings. This isolates liability between sites, simplifies partner buy-ins at the location level, and keeps real estate out of the operating risk pool, but it must be designed around your state's corporate practice of medicine rules.
Should I buy or lease my medical office space in 2026?
Buying medical office space typically beats leasing on a 10 to 15 year hold when the practice has stable cash flow, a clear long-term location, and access to financing at a rate that produces a healthy spread over market rent. Leasing beats buying when capital is better deployed in clinical growth, the location is uncertain, or the practice owner does not want to be a landlord. The decision is rarely about real estate; it is about capital allocation and risk tolerance.
Founder of Sorso. 19 years in corporate finance. Managed a $450M loan portfolio before building a fractional CFO firm exclusively for healthcare clinics.
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