In most med spa MSO structures, the management company (the MSO) should carry the practice’s profit or loss at year end. The clinical entity (the PC) should finish close to break-even. The management fee is what moves the profit, and a year-end true-up under your Management Services Agreement is how you land it. If your PC closes December with a large profit or loss on its books, the wrong owner ends up with the taxable income or the deductions.
I’m Nick Liguori. At Liguori Accounting, we work only with med spas and medical aesthetic practices. A lot of our clients come to us with MSO structures already in place. The legal documents are usually fine. The books are where things fall apart, and year end is when it shows.
Your exact structure depends on your MSA and your state’s rules, so the agreement itself belongs with a healthcare attorney. This post covers the accounting side: what needs to be true in your books before December 31.
Why does it matter which entity shows the profit?
The two entities usually have different owners. The PC is owned by a licensed physician or another provider your state allows. The MSO is often owned by the person who built the business. The profit should follow the economics of the arrangement, and in most structures those economics sit with the MSO.
When profit gets stranded in the PC, the PC’s owner can end up reporting income they never kept. When losses get stranded there, the deductions sit in an entity with no income to use them against.
“The goal is making sure the right people are paying the tax and receiving benefit for deductions.” Nick Liguori, CPA
Where should revenue land during the year?
Patient revenue for medical services belongs to the PC. Your EMR and payment processor should deposit into a bank account in the PC’s name, under the PC’s EIN. We walked through the full setup in MSO funds flow for med spas.
The mistake we see most often is one bank account for everything, usually under the MSO. Once that happens, every number downstream is harder to trust, and year end turns into forensic work.
Which expenses belong on which set of books?
Your MSA should spell out which entity pays for what. In most structures we see, provider payroll for clinical services runs through the PC. Front desk, admin, marketing, rent, software, and most other operating costs run through the MSO. The PC then pays the MSO a management fee for those services.
It’s fine operationally for one entity to pay a bill that belongs to the other. It just has to be recorded as an intercompany balance: a “due to” on one set of books and a matching “due from” on the other. By December, those two numbers should agree to the penny. If they don’t, something is coded wrong.
What is a year-end true-up?
Most MSAs set a management fee that’s paid monthly based on an estimate. The estimate is never exactly right. The true-up is the year-end adjustment that brings the fee in line with what the agreement actually calls for. In most structures, that means sweeping the PC’s remaining profit to the MSO or covering its shortfall.
How your fee can be calculated is a legal question as much as an accounting one. Some states restrict fees tied to a percentage of revenue, so the method has to match what your MSA and your state allow. Attorneys like Sara Shikhman and Emily Wright at Lengea Law, and Justin Marti at Marti Law Group, handle that side. We make sure the books follow it. We covered fee structures in how to structure your med spa MSO management fee [VERIFY URL: May 19 post].
What happens at tax time if the books are wrong?
If profit is stranded in the PC, someone pays tax on money that economically belongs to the MSO.
If losses are stranded in the PC, deductions may go unused in an entity with nothing to offset.
If intercompany balances don’t match, returns get delayed while someone rebuilds the year transaction by transaction.
If revenue is commingled, the problem goes beyond tax. It raises questions about whether the structure is operating the way the documents say it does.
None of these are hard to fix in October. All of them are harder to fix in March, when the year is closed and your options are narrower.
What should you check before December 31?
This is the October review we run for our MSO clients.
Confirm deposits. Patient revenue should be landing in the PC’s account, every processor and every location.
Review expense coding year to date. Look for payroll, rent, and software sitting in the wrong entity.
Reconcile intercompany balances. The due-to and due-from should match across both sets of books.
Project the true-up through December. Know the number before the year ends, not after.
Confirm the timing with your CPA. Depending on each entity’s accounting method, the true-up may need to be paid, not just recorded, before December 31 to count in this tax year.
Check that your MSA still matches reality. New locations, new providers, or a changed fee arrangement are worth a conversation with your attorney.
Nick walks through the full structure here: How Med Spa MSO Structures Should Really Work
Frequently asked questions
Do I really need two separate bank accounts if I have an MSO?
Yes. Two entities means two bank accounts and two sets of books. Patient revenue for medical services should deposit into the PC’s account. Separate accounts are also the simplest proof that the structure is real and not just on paper.
My PC showed a profit last year. Is that a problem?
Not necessarily a crisis, but it’s worth understanding why. Usually it means the management fee wasn’t trued up or expenses were coded to the wrong entity. Either one can be addressed going forward, and sometimes in the prior year’s books too.
What happens at tax time if my revenue and expenses are sitting in the wrong entity?
The returns reflect the wrong picture. Income can land on the wrong owner, deductions can get stranded, and your CPA has to untangle it before filing, which costs time and money. [FAQ drawn from interview prompt. Confirm wording.]
Who should set my management fee, my accountant or my attorney?
Both. Your attorney makes sure the fee method is allowed in your state and written into the MSA correctly. Your accountant makes sure the books follow it and that the year-end true-up lands where the agreement says it should.
Can you clean up an MSO that’s been run through one bank account?
Yes, and it’s one of the most common cleanups we do. It starts with separating revenue and expenses by entity, then rebuilding the intercompany balances so both sets of books agree.
If you’re not sure which entity is holding your profit right now, October is the time to find out. Book a discovery call and we’ll review both sets of books with you before the year closes.
