tax consequences of selling a dental practice

Tax ramifications of selling a dental practice: Sole proprietorship, partnership, or corporation (The Expert series for dentists) Dental Practice Valuations; Preparing To Sell; ... Tax Consequences of Buying and Selling a Practice . Selling a dental practice today is much different than it was years ago. He will recover (deduct) the cost based upon the type of asset. Buyers can acknowledge the practice goodwill they are purchasing and accept a 15-year tax write-off. We are hiring professionals to help support our dental offices. 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. When selling a practice, the owner is taxed based on the difference between the sale price and the tax basis. Based on this, the assets being sold may realize a capital gain and be subject to capital gains tax. 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. In contrast, in an asset sale, at least some of the assets will be taxed at ordinary income tax rates. Tax Considerations when Buying or Selling a Dental Practice – Part 3. The IRS has two ways to tax sales of assets where the seller makes money – ordinary income and long-term capital gains. General Sales and Use Tax Guidelines. The sale of a dental practice can quickly bump a seller into a steep tax bracket. Benefit from reduced expenditures and tax responsibility – new owners are responsible for practice insurance, real estate expenses, taxes and employee compensation/benefits. In most dental practice sales, a majority of the purchase price is allocated to goodwill. The buyer of the practice will record on his balance sheet the allocated purchase price of the assets acquired in the transaction. By doing so you would pay tax as you receive payments on … This includes items like furniture, fixtures, equipment, dental supplies, patient files, and goodwill of the current practice. Practice Management; Practice Transitions; Tax consequences of buying or selling a dental practice. 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. Dentists wishing to sell a practice in today's marketplace have a new buyer entity to consider – the dental services organization or DSO. As with most, if not all, tax practice acquisitions, the buyer and seller have very different points of view. If you thought you’ll cash the entire sales proceeds, sorry to disappoint you! Selling. If the selling practice is a C-corporation, the double taxation can cause asset sales to result in a nasty tax burden. It’s important to remember that fair market value to collections, while the most common valuation method, is not the only method to value a practice. This is the type of tax most people are familiar with. The sale of supplies generally generates ordinary income, which, depending on the seller’s tax bracket can be taxed as high as 50% when federal and state taxes are combined.  The sale of patient records, the non-complete covenant, and the goodwill are all taxed at long-term capital gains rates which currently max out at about 30% when federal and state tax rates are combined. The following example demonstrates the HST implications of an optometrist selling assets of his/her practice to another optometrist. A transaction involving a medical practice is even further complicated by confusing and often impractical health care laws. Reduce your tax obligation by gifting up to $14,000 per year to any individual, with no additional tax burden for the recipient. 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. Sellers also have the option of selling the assets of their practice. The dental supplies will be charged to expense as they are purchased by the practice. One other item that can affect the tax consequences is how the purchase price is paid. No two dental practice sales are the same and require specific understanding and application of the tax laws. This is a great question and one every dentist should consider well before selling their practice. Instead, sellers should consider owner financing some or all of the buyer’s practice purchase. Creative thinking also exposes other tax opportunities when selling a practice.  After paying taxes on the sale, most sellers will invest the remaining proceeds in hopes of getting that steady stream of income needed in retirement.  Instead, sellers should consider owner financing some or all of the buyer’s practice purchase.  In this scenario, the seller serves as the bank and allows the buyer to make payments over a number of years.  Since the income from the sale is not received all at once, the seller usually stays in a lower tax bracket than she would be in if she took in hundreds of thousands of dollars all at once.  She receives a steady stream of payments, plus interest, over a number of years, stays in lower tax brackets, defers most of the taxes in to future years, will likely pay fewer taxes overall, and, in the case of default, can take the practice back and sell it again. The implications of the asset sale will depend on the how they allocate the purchase price. 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. 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. Unlike shares, the LCGE is not available here. Many younger dentists have deep student debt , leaving less opportunity to establish or purchase their own firm. 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. As seen in DentistryIQ.com, August 21, 2017 By Michael S. Cerow, CPA, principal owner of Cerow and Company CPAs and Don Spiert, Director of Acquisitions at Benevis Practice Services. Most entity sales will be taxed at the long-term capital gains rate. Understand the Tax Consequences of Selling a Dental Practice. 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. Do not go it alone! No selling dentists want to be caught paying too much in taxes when they sell their practices. Unfortunately, sellers face a substantial income tax on the profits that they make from the sale. 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. The longer you own the practice – the longer you pay ordinary income tax. 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. When researching how to sell your dental practice, it’s important to consider the tax consequences.Specifically, you’ll want to investigate how much of the final sale price is allocated towards your practice’s assets. Selling stock creates a taxable event for the seller. 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. This rate, for 2018, is the same as the ordinary income tax rate, depending on the filing status. An alternative finance route when buying / selling a dental practice In essence, the seller replaces the traditional bank as the lender. Your tax advisor will be able to look at the options of maximizing Sec. April 1, 2016 | Category: BPE Newsletter. 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. "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). 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. 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. Selling a dental practice has many moving parts, not the least of which is handling taxes. The longer you own the practice – the longer you pay ordinary income tax. 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 … Please feel free to call me on 01844 260111. The purchase and sale of any business can be a daunting task. Sell your practice now when capital gain rates are still low. 2. While I can’t think of a better tenant than a dental practice, if for some reason the selling dentist just doesn’t want to continue to own that particular building, she can also take advantage of the IRS Section 1031 like-kind exchange rules.  These will allow her to trade this building for another income producing building while deferring the taxes down the road. Today in our last article we look at how to structure the sale of the dental practice transition. After the sale of your practice – you’ll benefit from the long-term capital gain rate – which is about. Filing a sales and use tax return is required for practices that partake in the following transactions: 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. What are the tax implications of selling a dental practice? 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. Another important opportunity that should not be overlooked is available to sellers who own the building in which they practice.  Selling the practice and keeping the building as a rental again provides the steady stream of income most retirees need, but that’s just the tip of the iceberg. Tax ramifications of selling a dental practice: Sole proprietorship, partnership, or corporation (The Expert series for dentists) [Janes, Patricia E] on Amazon.com. Generally, you will pay income tax on any profits you make. Creative thinking also exposes other tax opportunities when selling a practice. 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. Build Your Team of Advisors: Broker/Consultant, CPA/Accountant and an Attorney (keep them informed). Selling a dental practice is an emotional process for any doctor because of the relationships developed with their patients and staff over the years. For both buyers and sellers, a dental practice transition is typically the largest financial transaction they’ll enter into. 1601 Response Rd, Suite 110 Sacramento, CA 95815, 711 Jefferson Street, Suite 103 Fairfield, CA 95815, Tax Relief for Victims of California Wildfires, Important Information for PPP Loan Recipients. 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. The sale of different assets produces different types of income so the allocation of the sales price can directly affect the seller’s taxes. 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. 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. Let’s crunch some numbers. 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. 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. Tax strategies when selling your practice. How the Seller Gets Taxed when Buying a Dental Practice. Let’s look at ordinary income first. Buyer consequences. After paying taxes on the sale, most sellers will invest the remaining proceeds in hopes of getting that steady stream of income needed in retirement. 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. “What are the tax consequences when I sell my dental practice?”. 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. I will highlight several tax strategies when selling your dental practice. In those cases, selling the business in its entirety through a stock sale is usually a better choice because it only results in one tax bill. 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. In the most common sale structure, a dentist sells her practice for a lump sum of money.  Though we say the dentist is selling “the practice,” she is actually selling the assets of the business.  These generally include equipment, dental and office supplies, and patient records.  Often there is also a non-compete covenant as well. 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. 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. 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. The ordinary income tax rates start at 10% and go up to a whopping 39.6%! 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. While focused on business and contractual terms in the highly regulated health care industry, buyers and sellers often ignore important … 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. Selling a dental practice comes with various federal and state tax obligations. Most dentists report income from the sale of their practice during the same year. In our last article we looked at the tax considerations related to assets sold as part of the practice sale. Establish a profit-sharing plan for your practice. 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. Navigating all the details takes a close eye to detail – and an attorney who can help make sure you don’t overlook anything critical. Your tax advisor must understand your needs and goals in order to apply specific tax planning in your transaction. 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. 179 Depreciation election or Bonus Depreciation. Obviously, this varies depending on the amount, age, and type of equipment in the practice. One of the many important facets of a dental practice sale is taxes. 4. *FREE* shipping on qualifying offers. 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. Sole proprietorships can only be … The filing status look at the options of maximizing Sec from reduced expenditures and tax –... You make essence, the buyer of the current practice tax burden for the recipient and one dentist. Sell a practice in today 's marketplace have a new buyer entity to consider – the you... Also have the option of selling the assets of their practice understand the consequences. 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