Taxes are a fact of life, and an extremely important consideration when considering a dental practice transition or sale. Let’s explore some potential tax mitigation strategies to consider.
If you are incorporated, sale of the stock in your corporation to the dental practice buyer can potentially yield you the greatest tax savings, because the sale of stock is almost exclusively taxed at the lower fixed capital gains rate as compared to the higher, tiered ordinary income rates.
The IRS requires the total price of a dental practice for sale to be allocated to the various types of assets being sold and that the allocation be made according to the fair market value of the assets. As a general rule, the tangible assets are taxed as ordinary income above basis, and the intangible assets are taxed as capital gains.
CARRY BACK A NOTE
Sellers frequently ask us, “Won’t I save on taxes if I self-finance part or all of the sales price (i.e., carry back a promissory note from the buyer)?” The answer is, “No, but maybe . . .”
The tax associated with recapture over basis on the sale of tangible assets will be determined by your ordinary income tax bracket in the year of the sale. If you are planning to retire after the sale of your practice and, consequently, will have a drop in your ordinary income level, it may behoove you to strategically time the sale of your practice until after the start of the next tax year.
“C” CORPORATION CONSIDERATION
If you are currently incorporated and being taxed as a regular “C” Corporation, the sale of goodwill by your corporation will likely be subject to double taxation once as capital gains inside your corporation and then again as ordinary income when paid as a distribution to the shareholder(s).