Selling a dental practice requires owners to negotiate various issues during the transaction. Structuring a practice sale also involves consideration of the tax implications of the sale. An experienced dental law attorney can help you understand your options and ensure you’re making the right steps to best meet your needs.
Understanding the Taxation of Dental Practices
Most sales of dental practices occur as asset sales, where a practice sells all or substantially all of its assets to another practice, as opposed to structuring the sale as an equity sale, where the practice’s owner sells the stock or ownership interest in the corporate entity of the practice.
Federal tax law typically treats the sale of a professional practice, such as a dental practice, as a sale of multiple assets, including real estate, equipment, accounts receivable, patient records, and goodwill. The sale of each of these assets may constitute a taxable event subject to capital gains taxes or ordinary income taxes. The sale of tangible assets, such as accounts receivable, cash, and supplies, may result in ordinary income tax liability. Conversely, the sale of capital assets, including real estate, patient records, and goodwill, will result in capital gains taxes.
Whereas the IRS taxes ordinary income according to the progressive income tax scheme, it taxes long-term capital gains at a flat rate of 15 or 20 percent, depending on the taxpayer’s income. Short-term capital gains get taxed at the taxpayer’s ordinary income tax rate.
Key Assets in a Dental Practice Sale
When a dentist sells their practice, the transaction may include the sale of various assets, including:
- Tangible assets, such as dental chairs, equipment, furniture, and supplies
- Real estate, including owned property or leasehold interests
- Intellectual property, such as trademarks or trade dress
- Patient lists and records
- Goodwill
Allocating the sale price among the various assets included in the sale of a dental practice can affect a selling practice owner’s tax liabilities. However, both parties in a transaction must agree on the allocation of the sale price and report the same allocation to federal and state tax authorities. Because specific allocations may benefit sellers or buyers, negotiations over the sale of a dental practice often focus on allocating the sale price among the assets involved to achieve a mutually agreeable tax scheme for both parties.
Common Tax Considerations for Sellers
Dentists who sell their practices may have various tax-related considerations and concerns. Some of the top issues for sellers to consider include:
- Depreciation Recapture – Deductions on equipment or other assets by the selling practice may lead to additional taxes to recapture those deductions.
- Treatment of Goodwill – The portion of a dental practice sale attributed to the practice’s goodwill can affect the overall tax burden.
- State Taxes – State-level taxes can also affect a seller’s take-home proceeds.
- Retirement Planning – Many dentists who sell their practices do so as part of their retirement from the profession. As a result, sellers may consider structuring a sale to coincide with their retirement planning objectives and strategies.
Strategies to Minimize Tax Burdens
Essential strategies that dentists can use to minimize or manage their tax burden from the sale of their practice include:
- Planning Ahead – Beginning the tax planning process a year or more before a sale can help sellers structure the sale in the most tax-advantageous manner under their individual circumstances.
- Capital Gains Deferral Strategies – Sellers can defer the capital gains tax bill from a sale over multiple years through an installment sale, or they may defer capital gains tax on the sale of business real estate indefinitely by reinvesting those proceeds through a Section 1031 exchange.
- Working with Legal and Tax Advisors – Hiring attorneys and tax accountants can help sellers allocate sale proceeds to achieve optimal tax results.
Careful tax planning as part of selling a dental practice can help sellers save thousands or tens of thousands of dollars in taxes, allowing them to retain a greater portion of the wealth they have built in their practice.
Contact a Dental Attorney Today Before Selling Your Practice
When you prepare to sell your practice or retire from dentistry, understanding the tax implications of selling your business can help you maximize your gain from the sale so you can enjoy the fruits of your hard work. Contact Mahan Law today for an initial consultation with a dental attorney to learn more about the tax consequences of selling your practice.
