March 08, 2018
Dental Practice Transitions: Tax Considerations
When my dental clients get excited about the appraised value of their practice, I caution them with this advice from one of our most experienced advisors: “It’s not how much you sell your practice for, it’s how much you get to keep!” The same could be said for buyers of dental practices. Ultimately, it is the amount you pay for the practice that’s important, not the listed purchase price. 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.
In every dental practice transition, the purchase price is allocated among the assets purchased or sold and for future services rendered. Common allocation categories are:
- Equity (common stock)
- Equipment and supplies
- Restrictive covenant (non-compete contracts)
- Consulting fees and/or employment contract
Under the tax code, each one of these price allocations has their own tax treatment.
The buyer of a practice would like to write off as much of the purchase price as possible on his tax return. Consequently, the buyer would like to pay the majority of his purchase price in the form of consulting fees or salaries under an employment contract. These payments are immediately deductible on his tax return.
The seller, on the other hand, would like to minimize the amount of the selling price reported as income on her tax return. For example, the seller would perhaps like most of the sales price allocated to company stock, because the amount representing the return of her capital is not reported on her tax return while the excess allocation is taxed at the lower capital gains tax rate.
No matter the price allocation, the buyer and seller must be able to prove that each price component complies with current tax law. Two things to keep in mind:
1. I find it best when negotiating a dental practice transition to seek a win/win for both buyer and seller. That means each party must remain flexible when considering the tax benefits on the table in order to close the deal. For instance, sellers may have the opportunity to defer income taxes on the practice sale by making contributions to a qualified pension plan. Buyers can acknowledge the practice goodwill they are purchasing and accept a 15-year tax write-off.
2. For both buyers and sellers, a dental practice transition is typically the largest financial transaction they’ll enter into. Do not go it alone! It’s generally well worth the money to have competent consultants, along with legal and tax professionals, experienced in dental practice transitions.
In our next article, my colleague, Katie Collins, will identify and explain the five models of practice transitions. Have questions in the meantime? Please reach out to any of Buckingham’s Practice Integration Advisors. We are here to help you reach the destinations you envision!
This commentary originally appeared February 28 on DentalTown.com
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