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Income Tax Implications of a Dental Practice Sale by Tim Lott

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Income Tax Implications of a Dental Practice Sale 

by Tim Lott

Ready to buy a practice or sell yours? It’s important to keep in mind there are income tax implications, and they aren’t as cut and dry as you might think.

In this article, I’ll focus on asset sale transitions and the allocation of a dental practice purchase price between various assets and areas like consulting—from both a seller’s and a buyer’s perspective.


Non-income taxes to consider
Before I dive into the income tax implications of a dental practice sale, I want to briefly go over some of the other taxes (non-income) that often get overlooked. Buyers need to be aware of these taxes when they contemplate an asset sale transaction.

I am talking about sales tax and personal property tax. Some states and localities have the buyer pay sales tax on certain components of an asset sale, like furniture, equipment and dental supplies. This tax is usually paid at closing and, for example, is 6% in Maryland, where I’m located.

Working capital can be used to cover this upfront tax. Buyers may not want to get too aggressive with furniture and equipment price allocation.

It’s also important to note some states and localities assess personal property taxes on a business’s furniture and equipment.


Maximizing goodwill
Let me give you some history on how practice price allocation was approached in the past.
Until the mid-1990s or so, goodwill was not an asset buyers could amortize (deduct) from their income.

Goodwill was a non-deductible asset. It was only deductible if/when it became worthless. Therefore, we had other assets and areas that received higher purchase price allocation. Goodwill was lucky to get an allocation of $5,000 while $50,000 worth of furniture and equipment was valued at $250,000 (way overvalued). The same can be said for dental supplies and small tools and instruments. If they were worth $10,000, they might see an assigned value of $50,000 or even $75,000. We would see purchase price allocations to consulting agreements of $100,000+, lease values of $50,000 and buyers offering employment and fringe benefits to sellers over a number of years as part of the overall transaction (think health insurance and retirement benefits, maybe even business travel expenses). Back then, an amount assigned to a favorable lease could be written off over the remaining life of the lease. Not anymore.

Today, goodwill is an asset buyers can amortize over 15 years. Quite frankly, purchase price allocations have become more in-line with what the various assets are truly worth, though sometimes they can still teeter on the edge of unreasonable due to various factors.

Up until four or five years ago, sellers wanted most of the purchase price to be allocated to personal goodwill because it’s deemed to be a capital asset and subject to the capital gain income tax rates. However, since the Trump tax bill of 2017, some states now have pass-thru-entity taxes with S corps and partnerships. If a seller is in one of these states, the smart play might be to classify the goodwill as enterprise goodwill, an entity asset, like furniture and equipment. Why? Treating goodwill as a corporate asset allows the entity to pay and deduct the state tax on the gain of that asset while retaining the capital asset treatment on the federal return, the best of both worlds. Currently, your state and local income and sales taxes are capped at $10,000 on an individual tax return. Therefore, you are limited on the state income tax deduction on the sale of personal goodwill.

Goodwill is taxed if it was purchased and not organically generated through a scratch startup.
With purchased goodwill, because the seller has been deducting it over 15 years, the amount of those deductions is “recaptured” as ordinary income subject to the seller’s ordinary income tax brackets, not the federal capital gain tax brackets. Only the appreciation of goodwill is eligible for the federal capital gain tax brackets.


The value of consulting agreements
Many sellers are too quick to reject the consulting agreement idea without giving it thorough consideration.

While consulting income is considered ordinary income and potentially taxed at a higher rate than capital gain tax rates, having this earned income may allow sellers to continue some of the fringe benefits they were receiving as business owners. This could mean continued deductions for health insurance, retirement plans, business use of vehicles, mobile phones, business travel, meals, entertainment and so on. They might also continue to maintain their licenses, dues and subscriptions, continuing education, etc.

Continuing a business with business income also allows you to continue to benefit from expenses that are typically non-deductible on individual income tax returns. Buyers usually like a consulting agreement as part of the overall transaction as they get to deduct it in the year it’s paid.

Buyers prefer to get their income deductions sooner rather than later. This means higher purchase price allocations to tangible assets including dental supplies versus goodwill. This may also mean that, if real estate is also being sold, a buyer may prefer to shift some of the purchase price away from the real estate and onto the practice purchase price. The reason is, when it comes to real estate, purchase price must also be allocated to land and structure. The land is a non-deductible asset and the structure is generally deducted over 39 years—more than twice the time of goodwill deductions on a practice.

There is one exception: When real estate is expensive, buyers won’t want to shift any of the purchase price from real estate to the practice. For example, if the real estate purchase price is more than $500,000, a buyer will likely benefit from a cost segregation study so certain components can be deducted more quickly then 39 years. In some cases, these deductions can occur in one, five, seven and 15 years instead of 39.

It’s important to note that if the practice sale is combined with the sale of the practice real estate, both buyer and seller should consider the price allocation of the combined price between the practice and the real estate. There are benefits to both buyer and seller to carefully consider which asset to price higher or lower compared to the other asset. The final price of each asset still must, however, be reasonable.


A look at fees
Another income tax aspect of practice sales/purchases is how each party handles the professional fees associated with the transaction. Sellers may have a broker fee, CPA and attorney fees. While it would be easy if these expenses could simply be deemed ordinary deductions against the business income for that year, they can’t.

Sellers must allocate these costs to the various assets they sell, whether that’s goodwill, furniture and equipment, or dental supplies. Therefore, if goodwill was $100,000, sellers cannot tax that $100,000 at their capital gain tax rates; they must reduce it by the allocated professional fees and broker commission to that asset. Therefore, some of those expenses will be less valuable from an income tax deduction perspective because you might only be saving 15% or 20% versus 32% or 37%, a seller’s potential ordinary income tax rate.

From the buyer’s side, while they generally don’t pay the broker, they have professional fees to worry about as well. Under the tax code, a certain amount of those fees are limited to a first year deduction in the transaction year, while the excess is capitalized (treated as an asset) and amortized over 15 years.


Don’t go it alone
There’s a lot to know about the tax implications of a dental practice sale. Both sellers and buyers should seek competent advisors who have experience with dental practice transitions to guide them through the transaction. With the right help, buyers and sellers can minimize their overall tax burden, whether it’s income, PTE, sales or personal property taxes.
Author Bio
Dr. Danny Domingue Tim Lott provides consulting services to health care professionals and practices. He offers expertise in startups, mergers, transitions, tax and retirement planning, financing assistance and budgeting. Lott has a specific concentration on consulting to dental professionals on associate, partner and shareholder arrangements, practice management, revenue enhancement, practice purchase, sales, buy-ins and buyouts, and the related tax issues. He is also a longtime Townie and member of Dentaltown’s editorial advisory board..
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September 2025
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