For tax purposes, the sale price must be allocated among the various assets sold.  If there’s money left over after allocating the price to the assets mentioned here, the remainder is considered goodwill and can be thought of as the value the seller has added to the practice over time. Based on this, the assets being sold may realize a capital gain and be subject to capital gains tax. The longer you own the practice – the longer you pay ordinary income tax. A transaction involving a medical practice is even further complicated by confusing and often impractical health care laws. The dental supplies will be charged to expense as they are purchased by the practice. Selling a dental practice has many moving parts, not the least of which is handling taxes. The sale of a dental practice can quickly bump a seller into a steep tax bracket. Selling a dental practice is an emotional process for any doctor because of the relationships developed with their patients and staff over the years. When considering selling their practices, most dentists consider the tax consequences.  What they don’t always consider are the tax opportunities.  This article addresses both. Creative thinking also exposes other tax opportunities when selling a practice. In our last article we looked at the tax considerations related to assets sold as part of the practice sale. No selling dentists want to be caught paying too much in taxes when they sell their practices. Most people know that ordinary income is taxed at the standard rates which currently are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% depending on your income bracket and filing status. If you thought you’ll cash the entire sales proceeds, sorry to disappoint you! What are the tax implications of selling a dental practice? The buyer of the practice will record on his balance sheet the allocated purchase price of the assets acquired in the transaction. This includes items like furniture, fixtures, equipment, dental supplies, patient files, and goodwill of the current practice. One of the many important facets of a dental practice sale is taxes. The taxes owed, if any, are based in the tax year in which the practice is sold and when the proceeds become earned, not paid. The longer you own the practice – the longer you pay ordinary income tax. 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. Let’s crunch some numbers. Sellers also have the option of selling the assets of their practice. Filing a sales and use tax return is required for practices that partake in the following transactions: Do not go it alone! Set-up a retirement plan to shelter some of the money made from the sale of your practice – especially if you plan to stay in the practice after the sale. Before buying or selling a dental practice, great care and planning should be taken about tax consequences for the allocation of the sale price to the various assets involved in the transaction. Just because most dentists sell their practice all at once for a lump sum of money, doesn’t mean it’s the best way.  It’s certainly the easiest way, but with a little education and support from appropriate professionals, a creatively structured sale can reduce your taxes, give you a steady cash flow in retirement, increase your wealth, and provide a legacy to your children. Selling a dental practice comes with various federal and state tax obligations. Tax ramifications of selling a dental practice: Sole proprietorship, partnership, or corporation (The Expert series for dentists) [Janes, Patricia E] on Amazon.com. Bankers love to make loans to dentists because their average default rate is about 1%.  They are low risk customers.  In a seller finance situation, the seller takes on the same risk a bank would.  If that is still too much risk for the seller, she can protect her investment by taking a security interest in some other asset belonging to the buyer, such as a rental property owned free and clear. As with most, if not all, tax practice acquisitions, the buyer and seller have very different points of view. Over the years, the seller has been depreciating the building and claiming a deduction for this on her tax return.  If she sells the building, taxes will be paid on any gain recognized.  Part of the gain will likely be due to appreciation of the building over time.  This gain will be taxed at the lower long-term capital gains rates.  Any gain associated with depreciation taken in the past, will be taxed at higher ordinary income rates.  A seller in this situation will likely feel penniless after paying her taxes from the year of sale. Buyers can acknowledge the practice goodwill they are purchasing and accept a 15-year tax write-off. When selling a practice, the owner is taxed based on the difference between the sale price and the tax basis. Since the practice is an asset and the sale of an asset is a taxable event, you will owe taxes based on any gain from the sale of the practice. Unfortunately, sellers face a substantial income tax on the profits that they make from the sale. This is the type of tax most people are familiar with. No two dental practice sales are the same and require specific understanding and application of the tax laws. Sole proprietorships can only be … But there is an alternative, and it reduces the taxable gain on the sale of the building to zero.  If the seller keeps the building until her death, and then passes it to her heirs, all the depreciation she has taken over the years gets cleared, and they inherit the building at the fair market value at the date of her death.  This means that they can sell the building the next day for its market value and pay no taxes at all, or they can rent it out for many more years, taking advantage of the depreciation deduction all over again.  Amazing. Selling a dental practice today is much different than it was years ago. Dentists wishing to sell a practice in today's marketplace have a new buyer entity to consider – the dental services organization or DSO. 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. When one of our dental clients approaches us about buying or selling a dental practice they often ask if they should do it as an asset deal or share deal. Most dentists report income from the sale of their practice during the same year. The seller’s preference, therefore, is to allocate as much of the purchase price as possible to patient records, the non-compete covenant, and goodwill, and as little as possible to equipment and supplies.  Unfortunately, the buyer’s tax preferences will be in exact opposition to those of the seller.  The buyer’s tax benefit comes from allocating more to equipment and supplies and less to the intangible assets.  Even more unfortunate, the buyer and seller must both agree on the allocation of the purchase/sale price and report the results to the IRS. Answer : In short, most likely yes. 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 … Additionally, a dental practice is responsible for paying sales tax on the purchases of equipment and supplies, as well as items used in providing services, such as crowns, braces, and implants. For both buyers and sellers, a dental practice transition is typically the largest financial transaction they’ll enter into. 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. If I’m buying or selling a prosthodontics practice, I would note that average practice values are on the lower end, but more likely reflect the average overall dental transitions market. Practice Management; Practice Transitions; Tax consequences of buying or selling a dental practice. The sale of different assets produces different types of income so the allocation of the sales price can directly affect the seller’s taxes. 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. The IRS has two ways to tax sales of assets where the seller makes money – ordinary income and long-term capital gains. Tax ramifications of selling a dental practice: Sole proprietorship, partnership, or corporation (The Expert series for dentists) That said, in most practice sales, the majority of the value of the practice lay in goodwill, which is taxed at long-term capital gains rates. Here are some tips to help you plan the sale of your practice: It’s important to seek advice from your accountant before establishing a profit sharing plan and/or family gifting. One other item that can affect the tax consequences is how the purchase price is paid. When I tour around the Midwest giving presentations regarding selling a dental office, I without doubt come across dentists who “read an article or two and have a good understanding of the process” and want to handle the sale on their own to save money. Benefit from reduced expenditures and tax responsibility – new owners are responsible for practice insurance, real estate expenses, taxes and employee compensation/benefits. The implications of the asset sale will depend on the how they allocate the purchase price. 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. "Adding onto what was stated above, the only way to defer paying gain on the sale of a dental practice would be to carry the note (act as the bank). After the sale of your practice – you’ll benefit from the long-term capital gain rate – which is about one half of ordinary income tax rates. The sale of equipment has the potential to generate some capital gain income but often generates primarily ordinary income from the recapture of depreciation taken in prior years. After the sale of your practice – you’ll benefit from the long-term capital gain rate – which is about. Tax Considerations when Buying or Selling a Dental Practice – Part 3. If such stock interest were held less than a year, any gain (presumably a reason to sell the practice is to receive a capital gain) would be taxed at the higher short-term capital gains rate. Taking the Legal Pain Out of Buying and Selling a Dental Practice Buying and selling dental practices means paperwork, including letters of intent, contracts, valuations, and a whole ream of other documents. April 1, 2016 | Category: BPE Newsletter. The purchase and sale of any business can be a daunting task. In most sales, a compromise on the allocation of the purchase/sale price is reached somewhere in the middle, but that doesn’t have to be the case.  When there are conflicting interests, there is hidden opportunity.  Creative allocation of the price can be a great negotiation tool.  The allocation could be altered, for example, in exchange for a higher or lower purchase price. Instead, sellers should consider owner financing some or all of the buyer’s practice purchase. Reduce your tax obligation by gifting up to $14,000 per year to any individual, with no additional tax burden for the recipient. Selling. If the selling practice is a C-corporation, the double taxation can cause asset sales to result in a nasty tax burden. Selling stock creates a taxable event for the seller. Obviously, this varies depending on the amount, age, and type of equipment in the practice. While focused on business and contractual terms in the highly regulated health care industry, buyers and sellers often ignore important … Dental Practice Valuations; Preparing To Sell; ... Tax Consequences of Buying and Selling a Practice . In most dental practice sales, a majority of the purchase price is allocated to goodwill. Your tax advisor will be able to look at the options of maximizing Sec. By doing so you would pay tax as you receive payments on … 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. 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