How to maximize value and minimize taxes when selling a dental practice
When it comes to selling a dental practice, there are a lot of moving parts, among which handling taxes is one. The last thing that any dentist who sells their practice wants is to discover that they paid too much in taxes. The following tips may be helpful.
Have you ever considered selling your dental office? It takes a bit of time and careful planning, but optimizing your practice is a lot easier than you might expect. Among the most important considerations, every dentist should consider before selling is what are the tax implications? Post-sale financial obligations, in particular taxes, should not be overlooked. Additionally, a dentist’s most valuable asset is probably his or her practice, so getting the most money for it is crucial. To make selling a dental practice less stressful, we’ve compiled a list of several money-saving strategies.
Tax fundamentals
Tax liability related to the sale of your practice is heavily influenced by how the practice was originally established. You would be required to pay corporate income taxes if your practice was structured as a regular C Corporation (where profits are taxed separately from the owner). Corporate taxes in the United States currently range from 34% to 35% depending on the income level. Whether your practice is configured as a regular partnership (often a limited liability company by designation), S Corporation, or sole proprietorship, both ordinary and capital gains income taxes will need to be paid by the owners of the practice on their individual tax returns.
Maximize practice value
You should understand this when selling your practice-the practice is not taxed as a single entity. Each of the assets of a dental practice—equipment, supplies, real property, and goodwill—requires its own accounting and tax treatment. What are the reasons? Due to the IRS’s different depreciation and time factors for different practice assets.
Tax Table
Investing a significant portion of your practice sale income into long-term capital gain assets is a key to improving the value of your practice. Generally, the value of your practice is mostly based on the goodwill you have built up over the years, allowing you to reduce any taxes you owe after your practice is sold.
When you sell your practice, you want to minimize taxes
An example of how allocating practice income can save taxes
1. Improvements to a real estate property (book value) $267,308, sold for $250,000 = (17,308) (ordinary loss)
2. In this case, $28,801 (book value) was sold at $75,000 to produce $54,919 (ordinary income).
3. The value of goodwill at $650,000 is $650,000 (capital gain).
4. A tax payment of $143,163 would be based on a capital gains tax rate of 20% and a regular income tax rate of 35%
Consider the following adjustments to practice income
1. Sale of real property at $150,000 = ($117,308) (ordinary loss)
2. Selling equipment for $5,000 equals (15,801) ($15,801).
3. Adding the goodwill sale at $845,000, we get $845,000 (capital gain).
4. The tax payment on capital gains equals $122,412 if the capital gains tax is 20% and the income tax is 35%
There is a savings of $20,751 in taxes when practice income is properly allocated.
Lastly, consider these points
In the event that you sell your practice, your tax liability will depend on your current tax status (including filing status, additional income sources, deductions, and dependents claimed), plus ordinary and capital gains income from the sale. A dentist reporting income from the sale of their practice is not uncommon. As a result, some practice sale income may be deferred pending the date on which the agreement is signed and when it is paid. If you have any questions regarding personal finances and deal structures, it’s best to seek the advice of a tax professional and lawyer who has experience in practice sales so that all tax implications are addressed.