A dental practice transition requires expertise in many different areas of business and the law. I will narrow my advice as it applies to the U.S. federal income tax laws as they may apply in dental practice transitions. Proper tax planning and preparations in the sale of your dental practice can afford the seller of tax savings in particular transactions in excess of $100,000.
Tax savings depend on many different aspects of the sale of the dental practice and are not automatic tax savings in every practice sale. It should be noted there may be state tax laws that may apply where a dental practice transition occurs. It should also be noted that tax laws are subject to change, and there are some tax laws that existed 10 years ago that do not exist today or have significantly changed and can have a significant tax impact on the sale of your practice. No two dental practice sales are the same and require specific understanding and application of the tax laws. Your tax advisor must understand your needs and goals in order to apply specific tax planning in your transaction.
Tax strategies when selling your practice
Here are several tax strategies when selling a dental practice. Please note this represents only a summary of strategies:
1 – Familiarize yourself with the tax considerations in an asset sale of a dental practice and the allocations assigned to the particular assets being sold. There are several categories into which the assets are allocated. Some of these are taxed at the most favorable capital gains rate. Some are taxed as ordinary income. My colleague, Roy R. Rice, CPA, published an excellent article on this topic in the November 2007 issue of Dental Economics®. Both seller and purchaser must agree on these allocations and file IRS Form 8594.
2 – Most transitions require signing a covenant-not-to-compete. Such covenants are designed specifically to “accompany the transfer of goodwill and serve the primary purpose of assuring the purchaser of the beneficial enjoyment of the goodwill.” Revenue Ruling 65-180 provides that if the covenant-not-to-compete serves to preserve the transfer of the goodwill to the purchaser, and assuming the value of the covenant and goodwill cannot be determined, you may be entitled to treat the entire amount as a sale of goodwill.
3 – In limited circumstances, the sale of the practice will be the sale of your stock in your corporation. Such sales are entirely subject to capital gains.
4 – If you are a corporation (C-corp.) and have not made the S-corp election, then you should structure the sale to attribute all of the goodwill to be paid to you in your individual capacity as the doctor shareholder having the goodwill with the patients. Such strategy avoids the double tax that can occur in a C-corp.
5 – If you are going to take a note from the purchaser for a part of the sales price, be sure you understand how an installment sale works.
6 – If you own assets outside of your corporation, such as fully depreciated equipment or similar assets, you may consider gifting some or all of these assets to family to minimize tax consequences.
7 – If you are planning to stay in the practice for a period of time after the sale, you may consider using a retirement plan to shelter part of the sale.
8 – If you are a C-corp. and know you will be practicing at least 10 years before you sell, you should consider making an S-corp. election to avoid any double taxation.
9 – Before terminating your corporation after your practice sale, consult a CPA to evaluate your tax consideration.
10 – If you own your building, there are several considerations that may reduce your taxation: the use of a family limited partnership, and gifting a percentage interest to family members before the sale. There are available charitable giving options you may consider.
There is also the use of tax-free like kind exchange rules. For those interested in receiving this table of tax treatment for sellers and purchasers, please e-mail me.
Frank J. Brown, JD, LLM, (taxation) is president of American Dental Sales. Reach him at (940) 455-2299 or fbrown@ADStexas.com.