A dental practice is most likely a dental owner’s most valuable asset, and the sale of this asset comes with some complex tax consequences. When planning for retirement, you must consider the tax impact of a sale in order to truly understand what you’ll have in your pocket at the closing of a sale.
As you know, tax is paid on a dental practice’s profit each year. If you operate as a C Corporation, tax on profit is paid at the entity level at the current rate of 21%. If you operate as a flow-through entity (such as an S Corporation or Partnership), or a sole proprietorship, tax is paid on profits at the individual level on your personal return at your ordinary rate. In the year of the sale, in addition to tax being paid on any profit in that final year, tax will also be paid on the sales transaction.
The sale of a dental practice is not taxed at one set, ordinary rate, which makes the reporting and taxation of a practice sale different from that of practice profits. When selling a dental practice, there are several different assets of the practice being sold. These may include equipment, patient records, supplies, goodwill, and perhaps real estate. The IRS requires the identification of these categories of assets being sold, as regulations subject these different categories to different tax treatments. Categories such as supplies and equipment will be taxed at ordinary rates, whereas real estate, goodwill, and patient records will be taxed at a more favorable capital gain rate.
Currently, the maximum ordinary tax rate is 37%, and the maximum long-term capital gain rate is 20%. Because of this, the more pieces of your dental practice sale that can be grouped into a category that has capital gain treatment, the better for you as the seller.
This can be a confusing process. Developing a strategy and consulting with your trusted advisor can eliminate the confusion and can result in thousands of dollars in tax savings. Contact us today, we are here to help you through this process.
By Lauren Holt, CPA, Senior Manager (Rea & Associates)