The purchase of a dental practice will likely be the largest investment you make in your lifetime. As a buyer, there are some key tax implications you should consider before signing an agreement and taking ownership of your new business.
Types of Dental Practice Purchases
There are two types of purchases when acquiring a practice – a stock purchase or an asset purchase. In a stock purchase, the buyer is purchasing only the stock of the dental practice, so there are no deductions available for the buyer from the depreciation or amortization of purchased assets. In an asset purchase, the buyer is purchasing the various assets of the dental practice, such as equipment, goodwill and other intangibles. With an asset purchase, the buyer will be able to depreciate or amortize assets and receive a related deduction. In most cases, buying a dental office will be an asset purchase.
Understanding Allocation With the Sale of a Dental Practice
The allocation is an important piece of the dental practice purchase negotiation because in an asset purchase, the allocation of the purchase price determines the useful life over which assets can be depreciated. A purchase price is usually assigned to items such as furniture, fixtures and equipment, supplies, and other intangibles such as goodwill and a non-compete agreement.
These items have different tax implications for a buyer. Consider that supplies can likely be deducted for tax purposes in the year of the practice purchase. Furniture, fixtures and equipment will have opportunities to be written off in the year of purchase through Section 179 or bonus depreciation options, accelerating your deduction and tax savings. Goodwill and other intangibles are amortized over 15 years, meaning no immediate full deduction in the year of purchase is available. Goodwill is typically the largest piece of the purchase price. That’s why it will be imperative to have the right professional negotiating the purchase price, and that professional is mindful that the allocation of the price can save you significant dollars.
Choosing the Right Tax Personal to Help
In order to have options available to accelerate tax write-offs, as a buyer, it will be more beneficial for more of the purchase price to be allocated toward furniture and equipment or supplies. It’s important to note that the flip-side is true for the seller. The more of the purchase price allocated to goodwill or intangibles, the lower the tax on the sale. The strategies for tax savings differ significantly for a buyer and seller. It is important to choose an experienced dental transition consultant when entering into a practice purchase agreement.
Want to Learn More
The purchase of a dental practice 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 throughout this process.
By Lauren Holt, CPA, Senior Manager (Rea & Associates)