Tax Implications of Dental Practice Transitions
Every year, you have to think about taxes—both personal and professional (certainly when you own your own dental practice). There are a few strategies to engage in order to minimize tax implications when embarking on a dental practice transition.
There are a number of ways to structure the sales of a dental practice. Please consult with your NAPB dental practice broker as well as an accountant and tax law attorney to confirm that you are making sound decisions regarding the specifics of the deal.
The following are a few tax considerations when selling a dental practice:
- Schedule the Sale. When you sell can be just as critical (if not more so) than how or why you sell your dental practice. When you sell a tangible asset, you will be paying taxes during that tax year on your personal income. So, depending on your post-sale plans, it can be smart be strategic about when you sell the practice. For example, if you are selling to a partner and you are continuing to work, there will be less impact to your annual income than if you are retiring immediately after the sale. In the latter case, it might be wise to wait until the next calendar year so the sale happens in a year with reduced personal income.
- Long-Term Plan. If you are planning to sell your practice and then buy another one in a short period of time, there are some ways to postpone the taxes (that would not be possible if it were a direct sale). A 1031 Exchange is one way to do this; however, it’s a complex arrangement so be sure to consult with your team about this option. To the contrary, if you have only owned a practice for a short time and you’re planning to sell it with no intention of buying another practice, I advise against it. Do not sell if you have owned your for less than twelve months. In this scenario, it’s advisable to wait a full year before you sell in order to avoid a high short-term capital gains tax.
- Business Plan. As we’ve discussed in previous articles, a dental practice valuation can sometimes be challenging because every practice has both tangible and intangible assets. The tangible assets are relatively easy to quantify, but the intangibles are much more challenging to determine, and this can become even more complicated with taxation. If you are not operating as a sole proprietor, but instead are incorporated, you face the possibly of being taxed twice on the intangible components when selling a dental practice. So, the IRS taxes both the distribution as personal income and also taxes the capital gains inside the corporation. Again, it is wise to consult with a dental practice broker and they can often connect you with accountants and lawyers versed in dental practice transitions.
- Structure of Loan. Some sellers are under the impression that they can save on their taxes if they carry the loan for the buyer when selling their dental practice. In other words, the buyer pays the seller over time and thus the seller can avoid taxes. That’s not accurate. The tangible assets from the sale will be taxed during the year the practice is sold, whether the buyer pays you the entire amount at the time of sale or you negotiate a payment plan over time. Therefore, it’s a good idea to know the amount of the taxes so you can structure that currency influx into the deal.
Consult with your NAPB dental practice broker today. They can formulate both a plan and help cultivate a team to advise you about tax implications, ultimately garnering best outcomes for your dental practice transition.