tax considerations when selling a dental practice

Selling a dental practice can be daunting and many owners may not be aware of the relevant considerations when preparing for and carrying out such a sale. How to Attract New Patients and Grow Your Dental Practice, How to Manage Staff Expectations When Transitioning a Dental Office, Interested in Buying a Dental Practice? Common allocation categories are: Equity (common stock) Equipment and supplies Share 0. Before buying or selling a dental practice, great care and planning should be taken to consider the tax consequences regarding the allocation of the sale price to the various assets involved in the transaction. It’s a process that typically takes years and often hinges on firming up the financial plan of the owners. According to Bank of America, “Lenders usually look for the practice and doctor’s personal income to cash flow at a ratio of a 1.20%, which means the practice is expected to generate a $1.20 in revenue — or collections — for every $1 spent between the practice … In most sales, the value of the practice is largely comprised of the goodwill of the practice, which can help reduce the amount of taxes owed after the sale of the practice. The buyer wants to accelerate the tax deduction on the assets purchased, while the seller looks to minimize the income tax owed based on the sale price. US Dental Transitions was founded by a dentist with more than 25 years of experience, so we truly understand the complex, emotional and financial ramifications of perhaps the biggest change in the life of a practitioner. The seller will face a hefty income tax on the profits from the sale. Stock sales typically result in capital gains for the seller, and for many physicians the capital gains are taxed at a lower overall rate than the ordinary income rate. I will highlight several tax strategies when selling your dental practice. The more common approach to dental practice sales is to structure the transaction as an asset and personal goodwill sale. No one wants to be surprised by post-sale financial responsibilities, especially taxes. Selling your dental practice is an exciting, but challenging process that requires expert knowledge. These corporate groups are well-Dentists wishing to sell a practice in today's marketplace have a new buyer entity to consider – the dental services organization or DSO. Generally, you will pay income tax on any profits you make. Therefore, when initiating the purchase, the buyer should allocate a majority of the purchase to the items that depreciate quicker and less to the goodwill. This process takes time, requires expert counsel and a reputable buyer with both the articles and expertise to maintain and grow your practice into the future. This represents a summary and cannot address all issues under each particular strategy or all the strategies that may be considered. That said, some practice sale income might be deferred based on the date of sales agreement and timing of payout. The federal corporate tax rate is currently 34%, or 35% with income greater than $335,000. Typically, the group of assets that would be sold between the selling party and buying party would include dental supplies, furniture, […] Once we receive this information, it will take approximately 10-days to complete the core components of the practice valuation. Maneuvering this with a dental CPA will continue to make your transition a smooth one! Today in our last article we look at how to structure the sale of the dental practice … 5 Considerations to Keep in Mind. Selling or purchasing a dental practice is both an exciting and stressful period. Seek an adviser who understands tax laws and how to structure the best deal with these kinds of questions in mind: What are the tax considerations in your asset sale? Most dentists report income from the sale of their practice during the same year. Finally, long-term gains from the goodwill of your practice maintain a flat rate at 15%, and your income will never change that. Here’s a breakdown of practice asset depreciation and tax accounting: Maximizing the value of your practice requires strategically placing the majority of practice sale income in assets taxed as long-term capital gains. After selling your practice, your personal tax liability depends on your current tax situation (including filing status, additional income sources, deductions, and claimed dependents), plus consideration of both ordinary and capital gains income from the sale. When selling your practice, the extra tax burden a C corporation may face can result in a material reduction in net proceeds. Items that fall under ordinary income will face a tax rate somewhere between 10-35%. How the practice was originally established plays a significant role in determining the tax liability related to the sale of your practice. If your dental practice is structured correctly, you may be able to minimize the tax payable on a sale significantly so that you keep the vast majority of your sale proceeds. In contrast, in an asset sale, at least some of the assets will be taxed at ordinary income tax rates. The selling dentist is taxed on the difference between the sale price and the tax basis. As seen in DentistryIQ.com, August 21, 2017 The Q&A can be found in the Journal of The Michigan Dental Association (April 2020). The buyer should keep a detailed record of which assets from the sale are included in the final sale price. If you are serious about wanting advice on the sale of your dental practice and your future accounts and tax as a self-employed dental associate then my practice works exclusively with dentists based all over the UK. What are the allocations assigned to the particular assets being sold? A dental practice contains several different kinds of assets—equipment, supplies, real property, goodwill—and each asset requires separate accounting and tax rules. As with most, if not all, tax practice acquisitions, the buyer and seller have very different points of view. Here are four key considerations that you as a dental practice owner should be thinking about as you begin to mull a sale of your business: 1. These items are valued based on the original purchase price minus the claimed depreciation. Tax codes require a five to seven year pay-off period. Selling your dental practice – the tax implications Category: Healthcare - Posted On: Aug 28 2019 When the time comes to sell your incorporated dental practice, you will have two options – sell the shares in the company, or sell the assets of your company. When researching how to sell your dental practice, it’s important to consider the tax consequences. We reached out to John Urrutia from M.U.N. The goodwill of the practice grows in value over time, so it is categorized as a long-term, capital gain. It’s also important to get the most money for the practice, which is likely a dentist’s most valuable asset. Selling a dental practice doesn’t happen overnight. Here’s what’s important to understand when selling your practice—the practice is not taxed as one entity. Client Resource Centre – COVID 19 .cls-rev-notag-1{fill:#fff;}.cls-rev-notag-2{fill:#cc1a42;}.cls-rev-notag-grey{fill:#808285} Let’s crunch some numbers. Answer : In short, most likely yes. Tax Considerations when Buying or Selling a Dental Practice – Part 3. We are hiring professionals to help support our dental offices. Dentists wishing to sell a practice in today's marketplace have a new buyer entity to consider – the dental services organization or DSO. A major consideration early on is the ownership structure of your practice; specifically, consider the number and type of shares owned by individuals. How Long Does It Take to Sell a Dental Practice. In our last article we looked at the tax considerations related to assets sold as part of the practice sale. View Dental Practices For SaleLooking to Sell Your Practice? But, whether you happen to be the buyer or the seller of a dental practice, taxes are a key factor to consider in any transaction. Assuming you’re selling the practice $1 million, the price could be broken down as follows: Office equipment/furniture – $150,000; Dental supplies – $30,000 What they don’t always consider are the tax opportunities. Whilst trading in any business can be complicated, there are specific considerations which need to be addressed when dealing with specialised organisations, such as dental … After this documentation, he’ll need to deduct the cost of each asset accordingly. Specifically, you’ll want to investigate how much of the final sale price is allocated towards your practice’s assets. Health Care attorney, Daniel Schulte, answers questions related to the sale of a dental practice. It may seem obvious, but many sellers don’t realize they need to divide the sale price heavily towards assets that will produce long-term capital and less toward assets that lead to ordinary income. One of the most important considerations every dentist should think about before signing on the dotted line is: what are the tax consequences of selling? When selling your dental practice, you need to carefully consider all options and determine how to financially optimize the return on your investment while minimizing tax obligations. When you sell a tangible asset, you will be paying taxes during that tax year on your personal income. The goodwill of the purchased practice requires a different path to write off. It may be favourable to set up a separate professional corporation to purchase the vendor’s shares and then amalgamate the two corporations. Here are some important tax considerations for selling your dental practice. Here are some helpful tips. No selling dentists want to be caught paying too much in taxes when they sell their practices. Mr. Cerow can be reached at (321) 242-2511 and mcerow@cerowandcompany.com, and Mr. Spiert can be reached at (844) 879-0087 and dspiert@benevis.com. When considering selling their practices, most dentists consider the tax consequences. As seen in DentistryIQ.com, August 21, 2017, Real property improvements (book value) $267,308, sold @ $250,000 = ($17,308) (, Equipment (book value) $20,801, sold @ $75,000 = $54,919 (, Assuming 20% capital gains rate and 35% ordinary income tax rate =, Real property improvements sold @ $150,000 = ($117,308) (. Ordinary income is defined as any profit made from dental supplies, furniture, fixtures, and equipment. US Dental Transitions requires a signed listing agreement and a completed practice valuation packet, 3-years of tax returns, and production by provider codes. In episode 13 of the Tax Section Odyssey weekly video series, Raleigh Cutrer, CPA/PFS/ABV, Shareholder at Matthews, Cutrer and Lindsay, P.A., talks about five key areas to consider when in the process of selling The tax considerations of buying or selling a dental practice are only one part of the transition. Any decisions you make about the allocation of the sale price to the various assets that are involved in the purchase must be reflected in the final purchase contract. An asset deal is when the dentist (or his/her dentistry professional corporation “DPC”) buys the assets of the Seller’s practice whereas a share deal is when the dentist or his/her DPC purchases the shares of the Seller’s DPC. When you sell can be just as critical (if not more so) than how or why you sell your dental practice. It may seem obvious, but many sellers don’t realize they need to divide the sale price heavily towards assets that will produce long-term capital and less toward assets that lead to ordinary income. It’s always best to consult a tax professional and attorney with experience in practice sales to help answer any questions based upon your personal finances and practice deal structure to determine all tax implications. Final considerations. Typically, the group of assets that would be sold between the selling party and buying party would include dental supplies, furniture, fixtures, and equipment used in the practice, patient files, and goodwill of the … April 1, 2016 | Category: BPE Newsletter. However, the seller is at an advantage by having the power to allocate his assets how he sees fit. Any information we share will be kept in the utmost confidence. It will take fifteen years for the goodwill to be repaid. For corporate taxes, there is no difference in rates between ordinary income and capital gains. With our upcoming “Selling a Dental Practice: What You Need to Know” seminar coming up next Tuesday, February 28th, this seems like a perfect time to shed a little light on this topic. With this structure, the seller typically achieves long-term capital gain treatment (currently 15%) on the goodwill sale, but typically pays ordinary … Please feel free to call me on 01844 260111. What are the specific legal considerations I should keep in mind when selling a dental practice? Sure, it will take some time and careful planning, but it’s not as complicated as you might think to maximize the value of your practice. Southeast Transitions is now US Dental Transitions. For example, if your practice was set up as a regular C Corporation (C Corporation profits are taxed separately from the owner), all income from the sale is taxed at the corporate level. However, the seller is at an advantage by having the power to allocate his assets how he sees fit. If you intend to continue your legacy by selling to a dentist who will honor your desire to care for your patients and staff, we’re confident we can connect you with a buyer that can meet your selling criteria. Selling a dental practice has many moving parts, not the least of which is handling taxes. Have you ever thought about SELLING YOUR DENTAL PRACTICE? That said, in most practice sales, the majority of the value of the practice lay in goodwill, which is … Why? The sale of a dental practice can quickly bump a seller into a steep tax bracket. The selling dentist is taxed on the difference between the sale price and the tax basis. No two dental practice sales are alike, so refer to the experts. CPAs, a dental specific CPA, who specializes in dental practice transitions. As a tax practitioner for more than 40 years and a business valuation professional for 25 years, sales and valuations of tax practices have crossed my desk numerous times, in addition to making two acquisitions myself. 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. Contact us to discuss the value of your practice and how we can help you transition out of your office at or above market rate. 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