Corporate & Practice Receivables Protection

You may have heard of receivables factoring if you are a business owner and perhaps may have done it in the past. For the most part, when we think of factoring it means to sell the receivables for a discount to a factoring company in order to obtain advanced cash flows from the factoring company. This will provide cash flow normalization, if you will, for the business. The business gives up a part of the gross revenue from the sale of products or services. In simple concept and fashion, the risk associated with the book of receivables is assessed and a discount factor is applied. This is also similar to the sale of an existing note receivable where the purchaser works off a spread in the rates.

For asset protection purposes, the receivables are not necessarily a personal asset but remain as a corporate asset subject to the corporate creditors of a business and likewise, a medical practice. There are two core methods for asset protection of the receivables and they are 1) Financing, and 2) Asset Segregation.

Where financing is the application, the business takes a loan against the receivables and the receivables stand as collateral for the loan. In essence the receivables become liened to the lender. The practice receives the loan proceeds, free of taxation. The concern is then how to manage the loan proceeds. Using leverage as a mechanism against the receivables will add an interest cost to the picture. In some AR financing techniques, the after tax proceeds can be invested at a rate exceeding the interest cost on the loan. This promotes the concept of interest rate arbitrage on borrowed funds. Often enough with some programs, the after tax proceeds of the loan would be invested in a life insurance contract for the benefits of 1) tax deferred accumulation of cash values, 2) current tax law preferential distribution treatment and 3) a death benefit to secure some of the payback at death of a partner. This is only a general overview and introduction to the basic strategy.

Consequently, there are the following areas that need to be visited with any AR financing strategy and its implementation. IRC Section 83, in examination of the ownership and subsequent transfers of the policy, if any. Will there be any tax surprises to the detriment of the physician? Interest Deductibility under IRC Section 264, in examination of loan interest paid where the proceeds were invested in a deemed to be corporately owned life insurance contract. If you are examining an AR opportunity, diligent research and review needs to be done by your CPA/tax advisor. In addition, the legal agreements that back up the arrangement should in fact support sufficient asset protection for the account receivables.

(Discussion to be developed)