Physical therapy, occupational therapy, and speech-language pathology practices share a regulatory shape, Medicare CPT codes, the 8-minute rule, school-district contracts, AB 5 contractor exposure, that most generic CPAs have never modeled. The same tax mistakes show up across all three disciplines. So do the same wins. This is the working playbook for California therapy practice owners.
The Medicare 8-minute rule and what it means for the books
Medicare bills timed CPT codes in 15-minute increments. The 8-minute rule says you need at least 8 minutes of direct one-on-one service to bill a single unit. Two units require 23+ minutes. Three units, 38+ minutes. A clinician treating 50 minutes can bill 3 units; treating 45 minutes also bills 3; treating 36 minutes bills 2.
This matters for the books in two ways. First, productivity reporting. Clinician utilization measured in raw minutes overstates capacity; measured in billable units, it reflects real revenue. Second, payer-mix margin. Medicare’s per-unit reimbursement is fixed by the fee schedule. Commercial insurance is negotiated. Cash-pay is set by you. The per-clinician margin varies dramatically by payer mix, and you can’t see it without per-payer net-collection-rate reporting.
Most therapy practices don’t have this. The owner sees revenue and expenses; cannot see which payer mix actually pays the bills.
School district contracts: deferred revenue and the summer carry
Many speech and OT practices carry district contracts as a significant or primary revenue line. These contracts pay on 60- to 90-day cycles and stop in June. Cash flow looks strong in March and terrible in August.
The fix is the same one NPAs use: recognize revenue as services are delivered, not as cash arrives. Build a summer reserve from peak months. Use deferred-revenue accounting to surface real monthly margin. This treatment also opens working-capital financing, banks lend cleanly against steady earnings; they don’t lend against cash-basis statements that look seasonal.
AB 5 and the cost of misclassified clinicians
California’s AB 5 made the 1099 SLP, OT, or PT a much narrower category than most practices treat it as. The ABC test from Dynamex says the worker must (A) be free from control, (B) perform work outside the usual course of the hiring entity’s business, and (C) be engaged in an independently established trade.
The B prong is where therapy practices fail. When the practice is itself in the business of delivering speech, OT, or PT services, and the contractor is delivering speech, OT, or PT services as part of the practice’s contracted work, the worker is not performing work outside the usual course of the practice’s business. They’re performing work that is the practice’s business.
Most therapy practices pre-2020 still carry exposure. Voluntary reclassification is almost always cheaper than waiting for an EDD audit.
Entity structure: Professional Corporation vs LLC
California’s Corporations Code requires that licensed professionals delivering professional services through an entity use specific Professional Corporation forms, a PT Corporation, OT Corporation, or Speech-Language Pathology Corporation. LLC formations for licensed-clinician-delivered work generally don’t comply.
The S-corp election is layered on top. For sole-owner practices, the election typically pays for itself once K-1 income exceeds $120K-$150K. The breakeven is the point where the payroll-tax savings on the distribution portion outweighs the cost of running payroll and the administrative overhead.
Multi-owner practices add complexity: ownership percentages, salary vs distribution splits, buy-sell terms. The design happens in the operating documents before the year starts, not on the return after the year ends.
Equipment and AAC devices: §179 and bonus depreciation
Therapy practices buy capital equipment: AAC communication devices, gait trainers, hand-therapy modalities, exercise equipment, ultrasound, electrical stim. Single-use consumables (test kits, evaluation forms, single-patient supplies) are direct cost-of-service. Capitalized assets qualify for §179 expensing or bonus depreciation.
The §179 limit for 2026 is $1.25M with phaseout starting at $3.13M. Bonus depreciation is 60% in 2026 (and scheduled to phase down). For most therapy practices buying $30K-$200K of equipment per year, the choice between §179 and bonus comes down to taxable income and multi-year projections. We model the elections against your bracket before electing.
Teletherapy and multi-state nexus
Telehealth expanded rapidly in 2020-2022 and most therapy practices added remote sessions without revisiting the tax structure. A California-licensed SLP treating a patient temporarily in Nevada creates three things: licensing exposure (Nevada licensure rules), malpractice exposure (whose insurance covers the encounter), and state tax nexus (Nevada apportionment).
For most California practices the right path is to formalize the policy: which states you’ll provide telehealth services in, with licensing and registration in place, and which states you’ll decline. Casual cross-state delivery is the most common source of unintended exposure.
Practice growth: adding clinicians the right way
Adding a clinician is the most common growth lever and the most common entity-structure mistake. The right path is usually W-2 employment with a clear productivity model: base salary plus a per-billed-unit bonus, or pure productivity-based pay above a billable-hour minimum.
1099 contractor relationships rarely survive AB 5 in this niche. Equity partnership requires Professional Corporation documents that handle the licensing requirement, you typically can’t add a non-clinician owner. Buy-in math, salary parity, vote percentages, and exit terms get written into the documents before the partner starts, not after.
Common questions we hear
Do we have to use a Professional Corporation, or can we use an LLC?
In California, when the entity itself delivers the professional service, speech, OT, or PT, the Corporations Code generally requires a Professional Corporation. A PT Corporation for physical therapy, an OT Corporation for occupational therapy, and a Speech-Language Pathology Corporation for speech. LLC formations for licensed-clinician-delivered work usually don’t comply. If your service mix includes substantial non-licensed services (paraprofessional, behavior coaching, parent training), an LLC can sometimes work for the non-clinical line.
Should our therapy practice be an S-corp?
Once K-1 income from a single-owner practice exceeds roughly $120K-$150K, yes, the S-corp election typically pays for itself in self-employment tax savings. The mechanics: pay yourself reasonable W-2 compensation (typically 35-60% of net practice income depending on role and benchmark data), take the remainder as distribution, and avoid self-employment tax on the distribution portion. For a $250K-income practice, the typical savings are $14K-$18K per year.
How do we handle equipment purchases for tax purposes?
Single-use consumables are direct costs of service in the period used. Capitalized equipment (AAC devices, gait trainers, modalities) qualifies for §179 expensing or bonus depreciation. The choice depends on your taxable income, multi-year projections, and any financing terms. For most therapy practices buying $30K-$200K of equipment per year, §179 is the default, but bonus depreciation can be better in high-income years.
What if we have a couple of 1099 clinicians? Is that always a problem?
It depends on the specific facts. The ABC test is fact-dependent and the B prong is the usual failure point, if the contractor is delivering the same service the practice is contracted to provide, they’re almost certainly an employee. The ‘business-to-business’ exception is narrower than people think. We review each contractor relationship, recommend reclassification where indicated, and coordinate with employment counsel on any historical exposure.
How Milestone Handles This
We build therapy practice accounting around how the practice actually earns: per-payer net collection rates, per-clinician productivity, deferred revenue on district contracts, contractor-classification review on intake, equipment-strategy modeling, and entity-structure design before the year starts.
The engagement is flat-fee, scoped during the consultation, and committed in writing. We onboard in 30–60 days, restate prior periods where it adds clarity, and run the first full close before the next payer cycle.
Learn more about our work with PT, OT, and Speech Therapy Practices →
Schedule a complimentary 30-minute consultation: calendly.com/milestonecpas · Call 925-320-0309 · Email ronak@milestonecpas.com
Ronak Bhatt, CPA, MBA, Founder, Milestone Certified Public Accountants. AICPA + CalCPA member. Boutique Bay Area CPA practice serving business owners, real estate investors, and high-net-worth families.
