It’s no secret that there are many different aspects to consider when selling your dental practice. One of the many important facets of a dental practice sale is taxes. Unfortunately, sellers face a substantial income tax on the profits that they make from the sale. When selling a practice, the owner is taxed based on the difference between the sale price and the tax basis. While such takes can have a significant impact on the profit that the owner makes from the sale, there are measures one can take to reduce this effect. Minimizing taxes when selling your practice is essential, as it can end up saving you—or losing you—a substantial sum of money. Here are some important tax considerations for selling your dental practice.
Your practice is not taxed as one entity
One of the most important aspects of selling your dental practice—when it comes to taxes—is that your practice will not be taxed as a single entity. Instead, your practice will be taxed differently based on the variety of different assets that it contains. Such assets will typically include equipment, real property, goodwill, supplies, and patient records. Each of these assets adheres to different accounting and tax rules based on depreciation and time factors established by the IRS. The primary tax categories that a dental practice’s assets will fall under are ordinary income and long-term capital gain.
How to minimize taxes when selling your dental practice
As the seller of your practice, you have the advantage of being able to determine how your assets are allocated. As such, you’ll be able to divide the sale in a way that is optimally advantageous to you. To maximize the value of your practice, you should attempt to strategically place most of the practice sale income in assets that are taxed as long-term capital gains.
Long-term capital gains tax is applied to profits from the sale of an asset that will hold for more than a year. The tax rate for such assets will depend on your taxable income and filing status but are generally lower than short-term capital gains tax rates. Examples of long-term capital gain include practice goodwill, patient records, and real property.
Ordinary income, on the other hand, refers to items such as office supplies, furniture, fixtures, and dental equipment. Rather than growing over time, their value depreciates. As a result, such items are valued based on their original purchase price minus their claimed depreciation. Thus, placing your practice sale income in such assets is unadvisable.
Generally, the goodwill of the practice will largely comprise the value of a practice. As a result, the amount of taxes that the practice owner owns following the sale are reduced.
Because taxes are such a significant and intimidating factor in your practice sale, hiring a professional agency to help with your dental practice transition is often the best route.