The Tax Implications of Buying and Selling a Practice

The decision to buy or sell a professional practice is a significant one with far-reaching implications for both the buyer and the seller. It’s essential to understand the tax consequences of such a transaction, whether you’re a dentist, physician, attorney, or any other professional considering this step. This blog post aims to provide an overview of some of the tax implications involved in buying and selling a practice, specifically for the American audience. As always, it’s crucial to consult with a tax professional to ensure you make the most informed decision possible.

Buying a Practice

When purchasing a professional practice, the buyer needs to be aware of several tax issues. The most notable of these is the allocation of the purchase price among the various assets being acquired.

1. Asset Allocation

The purchase price should be allocated among the tangible and intangible assets of the practice, such as equipment, furniture, supplies, goodwill, and any non-compete agreements. The allocation of the purchase price is critical, as it determines the tax treatment of the assets and the available depreciation deductions for the buyer.

For example, if a significant portion of the purchase price is allocated to tangible assets such as equipment, the buyer may be able to benefit from accelerated depreciation deductions under the Modified Accelerated Cost Recovery System (MACRS) or the Section 179 expensing provisions. In contrast, if more of the purchase price is allocated to intangible assets like goodwill, the buyer will have to amortize the cost over a 15-year period under Section 197 of the Internal Revenue Code.

2. Tax Basis

The buyer’s tax basis in the acquired assets is generally equal to the purchase price allocated to each asset, plus any liabilities assumed by the buyer. The tax basis is essential, as it determines the gain or loss when the assets are eventually sold or disposed of by the buyer.

3. Due Diligence

Lastly, the buyer should conduct thorough due diligence on the practice’s financial records and tax filings to ensure they are in compliance with applicable tax laws and regulations. Any tax liabilities discovered during the due diligence process should be addressed in the purchase agreement, either through a reduction in the purchase price or an indemnification clause.

Selling a Practice

When selling a professional practice, the seller should be aware of the tax implications involved in the transaction. Some of the most critical tax considerations for the seller include:

1. Capital Gains vs. Ordinary Income

The tax treatment of the proceeds from the sale of a practice depends on the nature of the assets being sold. Generally, the sale of capital assets, such as equipment and goodwill, is subject to capital gains tax rates, which are typically lower than ordinary income tax rates. However, the sale of other assets, such as accounts receivable or inventory, may be subject to ordinary income tax rates.

2. Installment Sales

If the seller finances part of the purchase price for the buyer, the transaction may qualify as an installment sale under Section 453 of the Internal Revenue Code. This allows the seller to recognize the gain on the sale over the period in which the installment payments are received, potentially reducing the overall tax liability. However, interest must be charged on the installment payments, which are subject to ordinary income tax rates.

3. Tax on Non-Compete Agreements

If the seller enters into a non-compete agreement as part of the sale, the payment for the non-compete agreement is generally treated as ordinary income and is subject to ordinary income tax rates. The buyer, on the other hand, can amortize the cost of the non-compete agreement over 15 years under Section 197.

Conclusion

The tax consequences of buying and selling a professional practice are complex and can significantly impact the overall financial outcome of the transaction for both parties. It’s crucial to understand the tax implications involved and work with a tax professional to ensure the transaction is structured in the most tax-efficient manner possible. Proper planning and due diligence can help minimize potential tax liabilities and maximize the financial benefits for both the buyer and the seller.

Ash Dental CPA offers professional CPAs to help dental practices stay on top of all their accounting needs. If you are looking to buy a dental practice or sell one, work with us today!