Prerequisites
- Separate operating accounts per entity
- An executed MSA specifying the fee and its mechanics
- Board and member consents authorizing the arrangement
- A bookkeeper who will record both sides
The canonical monthly flow
Order matters. The PC covers its own obligations first. A fee paid ahead of clinical payroll, leaving the PC unable to pay its clinicians, is not a fee an arm’s-length practice would agree to.Steps, the monthly fee
1
Calculate the fee per the MSA
Using the contractual method, not a number you’d prefer.
2
The MSO issues an actual invoice
Numbered, dated, stating the period, the calculation, and the services rendered. Not a journal entry. For a cost-plus fee, show the cost base and the markup.
3
The PC pays it from the PC's operating account
Initiated on the PC’s authority, after clinical payroll and direct expenses.
4
Both entities book it at identical amounts
Management fee expense in the PC; management fee revenue in the MSO.
5
File the invoice in both entities' records
This is the document a regulator, auditor, or acquirer will ask for.
6
Reconcile the intercompany balances
Monthly. They must be equal and opposite.
Intercompany loans, done properly
Typically MSO → PC, funding the credentialing ramp before revenue arrives.1
Write a promissory note before the money moves
Not afterward. Required elements:
- Principal amount, or a revolving facility with a stated maximum
- Maturity date
- Repayment schedule
- Interest rate
- Events of default
- Governing law
2
Set the rate at no less than the applicable federal rate
Charge no less than the IRS applicable federal rate (AFR) for the note’s term class, short-term (3 years or less), mid-term (over 3 up to 9), or long-term (over 9). The IRS publishes AFRs monthly.Below-AFR related-party loans trigger imputed interest under IRC § 7872 and invite arm’s-length recharacterization under IRC § 482.1See Intercompany loans between MSO and PC for an annotated interest clause.
3
Adopt board and manager consents on both sides
Each entity independently authorizing the loan.
4
Make actual payments matching the schedule
A note with a repayment schedule that is never followed is evidence the loan was never a loan.
5
Book it correctly on both sides
Loan payable / receivable, with interest expense and interest income recognized as it accrues.
What never to do
A standing automated sweep is not a management fee. Why it fails:- No invoice means no evidence of a price for services: it looks like profit extraction, which is the fee-splitting fact pattern
- Automation implies control: an MSO that can pull PC funds without the PC acting has withdrawal authority over the practice’s receipts
- The amount usually isn’t the contractual fee: sweeps take what’s there, which means the MSA doesn’t describe what actually happens
- It’s unauditable, cash leaving the PC with no supporting document
- Pay one entity’s expense from the other’s account without recording an intercompany entry the same day
- Characterize a PC→MSO transfer as a “distribution”: the MSO is not the PC’s shareholder, and calling it one is evidence the parties treat the PC as though the MSO owns it
- Let a management fee accrue perpetually and never be paid in cash: it suggests the fee was never a price the PC could support, and it is a standard diligence adjustment
- Reprice past periods retroactively, the classic red flag
When the PC can’t pay in full
Common during the ramp. Two legitimate options: Defer part of the fee, in writing, with a stated payment expectation. Lend the PC the money, on a proper note at no less than the AFR. What you must not do is skip it silently, or have the MSO pay the PC’s bills directly with no intercompany entry.Verify it worked
- Every PC→MSO transfer has a matching invoice
- Fee amount matches the MSA’s stated calculation
- Fee paid in cash, from the PC’s account, on the PC’s authority
- Paid after clinical payroll and direct expenses
- Both entities booked identical amounts
- Invoices filed in both entities’ records
- Intercompany balances reconciled monthly and equal-and-opposite
- Every loan has a written note, an AFR-or-better rate, and board consents
- Loan payments actually made per schedule
- No standing sweep or MSO withdrawal authority
Common failure modes
Sources
- IRC § 7872 (below-market loans); IRC § 482 (allocation among related taxpayers). IRS, Applicable Federal Rates, published monthly. Confirm current rates and treatment with a CPA.