Tax Strategies for Selling a Dental Practice
The basic premise in practice transitions is that buyers prefer to pay with tax deductible dollars, while sellers want capital gains.
The sale of Dr. Seller’s shares of stock in his or her professional corporation certainly create capital gain, however, what the buyer pays for the shares is non-deductible. Therefore, stock sales tend to be rare. Typically, the practice’s assets are sold, and the total practice value gets allocated between the tangible assets and the intangible asset (i.e., goodwill). Along with the goodwill being sold, Dr. Seller will give Dr. Buyer a covenant not to compete that will be generous enough to protect Dr. Buyer.
Typically, the bulk of the practice value is in the goodwill. This is good for Dr. Seller, because it goodwill is taxed at the lower capital gains tax rates. This is still a decent result for Dr. Buyer, because what is paid for goodwill will be deductible, though over a relatively slow 15 years. Gain on the sale of the tangible practice assets is typically taxed to Dr. Seller at the higher ordinary income tax rates, and deductible to Dr. Buyer much more quickly. In general, Dr. Buyers prefer allocations to the tangible assets, while Dr. Sellers prefer the allocations to goodwill.
Structuring the tax outcomes in a practice buy-in (partnership) can become more complicated. The good news is that this is rarely a complicating factor, and a design should be available that both sides can be happy with.