As tax season approaches, dental practice owners preparing for a sale are looking for ways to reduce tax liability and maximize earnings. Selling a practice is a major financial event, and without proper planning, taxes can significantly impact your final payout. By understanding key tax implications — such as capital gains tax, asset allocation and tax deferral strategies — you can keep more of your hard-earned money.
Capital Gains Tax and Its Impact on Your Sale
One of the biggest tax considerations when selling your dental practice is capital gains tax. The IRS taxes profits from your sale based on how long you’ve owned the assets:
- Short-term capital gains (for assets held less than a year) are taxed at ordinary income tax rates
- Long-term capital gains (for assets held longer than a year) are taxed at a lower rate—typically 15% or 20%, depending on your income bracket
Since most dental practice sales involve long-term-held assets, properly classifying and allocating them is crucial to minimizing tax liability.
Asset Allocation: A Key Strategy for Tax Efficiency
A dental practice sale consists of both tangible and intangible assets, each treated differently for tax purposes:
- Goodwill: Typically the largest portion of a practice’s value, goodwill is taxed at the lower long-term capital gains rate
- Equipment & Fixtures: Depreciated assets may be subject to depreciation recapture, taxed at ordinary income rates
- Real Estate: If you own the property, selling it may trigger capital gains tax or depreciation recapture
Strategic asset allocation can lead to substantial tax savings. A tax professional can help structure the sale to maximize efficiency.
Tax-Saving Strategies for Your Practice Sale
- Installment Sales: Spreading payments over multiple years can keep you in a lower tax bracket.
- 1031 Exchange (for Real Estate Owners): Defers capital gains tax by reinvesting proceeds into another property.
- Qualified Small Business Stock (QSBS) Exemption: If structured as a C corporation, you may qualify for capital gains exclusions.
- Retirement Contributions: Maximizing tax-advantaged retirement contributions before the sale reduces taxable income.
- State Tax Considerations: Relocating before your sale could reduce your tax burden, depending on state laws.
Plan Your Transition With Experts
Selling your dental practice is about more than just finding the right buyer—it’s about structuring the sale to ensure you retain as much value as possible. At Professional Transition Strategies, we specialize in helping dental practice owners navigate sales while implementing smart tax strategies. If you're considering a transition, contact us today to start planning your sale the right way.