Tax Implications of a Dental Practice Purchase and Ownership

Let’s look at some of the main areas of a practice acquisition that can impact your taxes. Remember, every situation is different, and this is not financial or legal advice. 

• Usually, a purchase acquisition is treated as an asset sale, not an equity sale. 
• Assets like equipment get stepped-up basis for depreciation. This stepped-up basis allows the buyer to claim higher depreciation deductions on these assets.
• Goodwill is amortizable over 15 years. You can deduct a portion of the value of the practice’s goodwill annually.
• There is some flexibility in asset allocation that you can negotiate with the seller. The specific asset allocation you arrive at may have a big impact on your tax liability. 
• When the seller of a dental practice claims depreciation deductions on assets, some of that depreciation gets “recaptured” at the time of sale. This means the deductions are essentially paid back.
• Accounts receivable (A/R) tax treatment. If you’re acquiring accounts receivable in the acquisition, they can be taxed using the cash method or the accrual method. The accrual method gives you a first-year tax liability of the entire A/R, while the cash method allows you to defer paying taxes on A/R until the amounts are actually collected.
• Pass-through income: most practices are structured as S-corporations or LLCs rather than C-corporations. This means that income passes through to your personal tax return. It’s reported on your personal 1040 and taxed at individual income tax rates.
• Most practice owners are subject to self-employment taxes—15.3% of the practice’s net profit.
• If you’re structuring the deal as an earn-out, that has different tax implications from a regular “upfront” deal. Earnouts may result in higher taxes early on due to lower initial deductions, and then lower taxes later as deductions are claimed.

With the right structure and guidance, you can optimize for depreciation, amortization, and deductions. Consult a dental CPA during negotiations and due diligence to maximize tax benefits.

What is Asset Allocation?

The term “asset allocation” refers to the attribution of percentages of a practice’s purchase price to different components of the practice. Imagine that the total purchase price is a pie. Asset allocation is dividing up the pie: this much of the purchase price goes to equipment, that much to goodwill, etc. 

Why it’s important: different “assets” within the business get different tax treatment. For example, assets like equipment can get a stepped-up tax basis, allowing the buyer to claim higher depreciation deductions. Goodwill can be amortized over 15 years. 

In short, you can save on taxes by how you slice the pie: attributing more value to assets with preferable tax treatment and less value to other assets.

Naturally, there’s a limit: you can’t stretch things too far with asset allocation. A good dental practice CPA will help you save a bundle by knowing exactly where that limit lies.