> ## Documentation Index > Fetch the complete documentation index at: https://dso.getlemma.com/llms.txt > Use this file to discover all available pages before exploring further. # Prepare for taxes across entities > Orientation, not advice: PC elections, DSO classification, state income and franchise taxes per entity per state, transfer pricing hygiene, and the CPA question list. A DSO-PC group can create separate federal, state, local, owner, payroll, sales-tax, and information-return obligations. The count depends on each entity's tax classification, elections, ownership, nexus, income sourcing, and filing rules. This page assembles the fact questions a CPA needs. ## Prerequisites * Both entities formed with EINs * Bookkeeping current and per-entity * A CPA with multi-entity and dental experience ## The entity-level questions ### The PC | Question | Consideration | | -------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | **C-corp or S-corp?** | A PC taxed as a C-corporation that is a **personal service corporation** faces a flat 21% federal rate under IRC § 11(b), with no graduated brackets.1 Many PCs elect S status so income passes through to the dentist-owner. | | **When is the S election due?** | Form 2553 has a deadline tied to the tax year. Missing it costs a year. | | **Does the state recognize the S election?** | Not all do, and some impose entity-level taxes regardless. | | **What happens to the residual?** | Determine who owns it, whether it is retained or distributed, and how management fees, reasonable compensation, solvency, and state professional-practice rules affect the tax treatment. Do not assume a practice must run near break-even. | **The S election interacts with the friendly dentist's personal taxes.** Pass-through income flows to their return, which means the structure's design affects their tax position. This is one of several reasons the dentist-owner needs their own advisors, and it should be discussed before the election, not after. ### The DSO | Question | Consideration | | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | **Pass-through, disregarded entity, partnership, S corporation, or C corporation?** | LLC defaults depend on owner count, and elections can change classification. Investor, financing, benefit, and exit plans affect the choice. | | **When to convert?** | Usually at or before a priced round. Conversion has its own tax consequences. | | **QSBS?** | Qualified small business stock treatment under IRC § 1202 may be relevant for a C-corp, worth asking about early, because eligibility depends on facts at issuance. | ## The multi-state questions Each entity, in each state where it operates: | Item | Notes | | -------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | | **State income tax** | Filing obligations wherever nexus exists | | **Franchise / margin tax** | Separate from income tax; Delaware, Texas, and others impose it regardless of income | | **Apportionment** | How income is allocated across states, rules differ, and healthcare services sourcing can be non-obvious | | **Employer taxes** | Withholding and unemployment, per entity per state | | **Sales tax** | Usually not imposed on dental services, but retail products such as whitening kits and electric toothbrushes may be taxable. States also treat lab-fabricated appliances differently, so verify the rules in each state. | | **Local taxes** | City and county business taxes in some jurisdictions | A ten-state group may create support-company and practice filings in multiple jurisdictions. The number of returns depends on actual nexus, apportionment, entity classification, and local rules. Do not assume one return per state. ## Transfer pricing hygiene The management fee may fall within IRC § 482 where the statutory common-control standard is met; that standard is fact-based and broader than formal equity ownership.2 **Do not collapse the standards.** Transfer pricing, fair market value, commercial reasonableness, state fee-splitting, professional control, and federal referral rules can ask different questions. One valuation may inform several workstreams, but satisfying one does not establish the others. What creates exposure is a fee set to move income between jurisdictions, for instance, a fee sized to strip income from a high-tax state into a low-tax one. That is a § 482 problem and, separately, an FMV problem. Keep: the FMV analysis, the cost basis for the fee, the allocation methodology across PCs, the invoices, and evidence of actual payment. ## Intercompany loans Loans between the entities must carry interest at no less than the **applicable federal rate** for the note's term class. Below-AFR related-party loans trigger imputed interest under IRC § 7872 and invite § 482 recharacterization.3 The IRS publishes AFRs monthly. See [Intercompany loans between DSO and PC](/reference/legal/intercompany-loan-note). ## Information returns Both entities have their own obligations: | Form | Issued by | For | | --------- | ------------- | --------------------------- | | W-2 | Each entity | Its own employees | | 1099-NEC | Each entity | Contractors it paid | | 1099-MISC | As applicable | Rent, other payments | | 1042-S | As applicable | Payments to foreign persons | **Two employers means two sets of W-2s.** A dentist or hygienist employed by the PC gets a PC W-2; an office manager gets a DSO W-2. Someone who moved between entities mid-year gets both. ## The CPA question list Bring these to the engagement: * [ ] Should the PC elect S-corp status, and what are the consequences for the dentist-owner personally? * [ ] What is the deadline for that election given our formation date? * [ ] Does our state recognize the S election, and does it impose entity-level tax anyway? * [ ] Should the DSO be an LLC or a C-corp given our raise timeline, and when should we convert? * [ ] Is QSBS relevant, and what would we need to do now to preserve eligibility? * [ ] What are our nexus and filing obligations in each operating state, for each entity? * [ ] How should management fee income be apportioned across states? * [ ] Does our management fee methodology hold up as arm's-length under § 482? * [ ] What documentation should we maintain to support it? * [ ] What rate must our intercompany loans carry, and how should accrued interest be handled? * [ ] Are any of our retail product sales subject to sales tax? * [ ] How should buildout and equipment for a new office be depreciated, and does Section 179 or bonus depreciation apply? * [ ] What estimated tax payments should each entity be making, and from which account? * [ ] How should credentialing-period and de novo ramp losses in a new PC be treated? ## Practical hygiene In the DSO. Estimated taxes set aside so they aren't mistaken for working capital. Tax filings are per entity. Consolidated-only books make every filing an excavation. Contemporaneously, not reconstructed. On the compliance calendar. See [Set up your compliance calendar](/start/first-90-days/compliance-calendar). New state, new entity, fee change, or conversion. ## Common failure modes | Failure | Consequence | | ------------------------------------------------- | ---------------------------------- | | Missing the S-election deadline | A year of unintended treatment | | Not registering in a state where nexus exists | Back taxes, penalties, interest | | Management fee set to shift income between states | § 482 exposure and an FMV problem | | Intercompany loans below AFR | Imputed interest | | No transfer pricing documentation | Weak position on examination | | Consolidated-only books | Every filing is an excavation | | Sales tax on retail products overlooked | Accrued liability discovered later | | Estimated taxes not reserved | Cash crunch at filing | ## Sources 1. IRC § 11(b). [26 U.S.C. § 11](https://www.law.cornell.edu/uscode/text/26/11). 2. IRC § 482. [26 U.S.C. § 482](https://www.law.cornell.edu/uscode/text/26/482). 3. IRC § 7872; IRS, [Applicable Federal Rates](https://www.irs.gov/applicable-federal-rates).