If not carefully planned – and ideally with professional guidance from a tax expert – structuring the sale of your dental practice can have negative tax consequences. In fact, a poorly-structured deal can cost you thousands of dollars in extra tax liability.
To help you plan the sale of your practice, experts recommend working with a specialist tax professional early on in the process, rather than doing it only when a buyer has been found.
Early tax planning may help you enjoy a more significant tax reduction for dentists, and here’s how:
Structuring the deal
With the majority of practice sales structured as asset sales, this means that the purchase price must be allocated among certain categories, such as supplies, equipment, goodwill and accounts receivable, which is then reported using Form 8594 by both parties.
Here’s how the categories are taxed:
- Equipment might trigger depreciation recapture, which is taxed at regular income rates
- Accounts receivable are usually taxed as ordinary income
- Goodwill may qualify for treatment as long-term capital gains
Purchase price allocation has a direct impact on what the seller gets to keep, with ordinary income rates generally being higher than those of capital gains. In contrast, membership interest sales or stock are often taxed at capital gains rates, although buyers tend to favor asset sales for the tax benefits it offers them.
How a deal is structured is more than a mere formality; it shapes the entire tax outcome.
Depreciation recapture and ordinary income
The vast majority of dentists will have benefitted from Section 179, accelerated depreciation, or bonus depreciation on equipment or advancements, and when they sell those assets, rules surrounding depreciation recapture may demand that instead of the gain being taxed at capital gains rates, part of it must be taxed at ordinary income rates.
For practices with a lot of equipment, this can increase the tax owed on the sale by a significant amount.
Goodwill as a planning opportunity
Usually treated as a capital asset, a large portion of a practice’s purchase price is attributed to goodwill, which includes patient relationships, the practice’s reputation and ongoing operations. If held for more than a year, goodwill may be eligible for treatment as long-term capitals gains.
Spreading the tax burden with instalment sales
In a practice transition involving instalment payments over a number of years, practice owners may be able to better manage marginal tax brackets, enhance how they plan cashflow, and lower the impact of a single high-income year.
Although this type of sale structure offers flexibility, there is also an element of risk.
Entity structures
Influencing the division between capital gains and ordinary income, how an entity is structured can affect buyer preferences and the transition structure as a whole.
To find out how being an S corporation, C corporation, partnership or sole proprietorship would affect the sale of your practice, talk to experts in tax planning for dentists in Fort Lauderdale.
Sale timing
When you close the sale of your practice can have a significant impact on several areas of your financial life, such as closing in December instead of January. Gains recognition may be shifted to a different tax year, and impact Medicare premium calculations, Net Investment Income Tax, retirement contribution opportunities and charitable giving strategies, among others.
Consulting with a dental tax specialist can help you time the sale of your practice, intelligently.
The difference between a smooth sale transition, and an expensive and stressful one, often comes down to the simple act of seeking professional advice and guidance from the right people, at the right time. Specialists in dental accounting and taxes can help you sell your practice in the most tax-efficient manner, and getting their help early on in the process, gives you the best chance of securing a tax-friendly deal.
