If you’re looking for a way to reduce your dental practice’s tax liability and make the most of your hard-earned money, you may be considering selling it. However, while this may be a good move strategically, it’s still a significant financial event that requires specialist tax planning and guidance; fail to get the proper help, and it could end up eating into your proceeds.
By working with a local firm who specialize in tax write offs for dentists, you can get to grips with the most important tax implications of selling your dental practice, like asset allocation, capital gains tax and strategies for tax deferral, which will help you hold on to more of your money.
Here’s more on those tax implications:
How capital gains tax might affect the sale of your practice
Capital gains tax is one of the most important tax implications when selling a dental practice, with the IRS taxing your sale profits based upon the amount of time you’ve owned your assets for:
1. Short-term capital gains
These are taxed at standard rates for income tax, provided the assets have been held for less than a year
2. Long-term capital gains
For assets that have been held longer than a year, a lower rate of tax is applicable for such long-term capital gains. Depending on your income bracket, this is usually at 15 or 20%.
The majority of dental practice sales involve assets that have been held on a long-term basis, and if you want to minimize your tax liability as much as possible, it’s essential that you seek professional guidance on how to classify and allocate those assets.
Efficient asset allocation
Unfortunately, selling a dental practice isn’t a straightforward transaction, rather it’s a combination of assets that are both tangible, and intangible. For tax purposes, these assets are categorized differently by the IRS:
1. Goodwill
Taxed at lower, long-term capital gains rate, charitable giving often makes up a significant portion of the value of a practice.
2. Fixtures and equipment
Assets that are depreciated, such as equipment and fixtures, might be subjected to something known as ‘depreciation recapture,’ which is taxed at a higher ordinary income tax rate.
3. Real estate
For a practice that owns real estate, selling it might trigger depreciation recapture, or capital gains tax.
As a dental practice owner, you can make some hefty tax savings when your asset allocation is structured properly, emphasizing the importance of working with a specialist dental tax professional to get the very best breakdown possible.
Tax liability minimizing strategies
Here are a few strategies a dental tax professional might encourage you to use in order to limit tax liability when selling your practice:
1. Instalment sales
Structuring the sale in what is known as an ‘instalment agreement,’ could help you spread the burden of tax over a number of years to keep you in a lower tax bracket every year. This strategy involves the whole purchase price not being received upfront.
2. 1031 Exchange
For dentists who own their practice’s real estate, you can defer capital gains tax with a 1031 exchange, by reinvesting the proceeds into a similar type of property.
3. Qualified Small Business Stock, or QSBS Exemption
Provided your practice meets specific criteria and is structured as a C-corporation, there may be an opportunity for exclusions on capital gains for stock sales.
4. Retirement account contributions
Contributing as much as possible to retirement accounts that are tax-advantaged before the practice is sold, can lower taxable income as well as offer long-term benefits.
5. State tax considerations
Some states have significant capital gains tax rates, while others have none at all. To maximize your tax reduction for dentists, it might be worth studying state tax laws with help from a dental tax expert, and relocating before the sale goes ahead.
With significant tax implications involved, selling a dental practice should always be planned following guidance from a dental tax professional, who can help you reduce your tax liability, optimize your sale structure, and keep the whole process smooth and stress-free.