Practice Orbit How Much Tax You Pay When You Sell a Dental Practice: Key Considerations
If you’re a dentist thinking about selling your practice, one of the first questions that likely comes to mind is: How much tax do you pay when you sell a dental practice? It’s a question I’ve seen many of my clients struggle with, as they prepare for a smooth exit, only to find that the tax bill eats into their hard-earned profits. The good news is that with some smart planning and guidance, you can minimize the tax hit and maximize your financial return.
In this post, I’ll walk you through the key tax considerations when selling your dental practice, drawing from stories and lessons learned from my years of experience. We’ll also take a look at how Practice Orbit helps you navigate this complex terrain and ensures that the sale of your practice is as profitable as possible.
1. Understand Capital Gains vs. Ordinary Income
One of the first things you need to know is that the money you make from selling your dental practice will be taxed in different ways, depending on how the sale is structured. You could be taxed at a lower capital gains tax rate or at a higher ordinary income tax rate.
Let me tell you about Dr. Jill, a dentist who had run her practice for over 20 years. She was thrilled to get an offer and assumed the proceeds from the sale would go directly into her retirement fund. However, she didn’t realize that how the sale was structured would dramatically affect her tax liability. In the end, she was hit with a large tax bill because part of her sale was classified as ordinary income.
When selling a dental practice, the sale price is often split between tangible assets like equipment, and intangible assets like goodwill. Goodwill, which is essentially the reputation and patient base you’ve built over the years, is typically taxed at the lower capital gains rate. Meanwhile, any equipment, furniture, or supplies may be subject to higher ordinary income tax rates.
Practice Orbit offers guidance on structuring your sale to minimize taxes by allocating the sale price strategically between assets. This can mean the difference between paying a higher ordinary income tax rate versus a more favorable capital gains rate.
2. How Your Business Structure Affects Your Taxes
The type of legal entity your dental practice is structured as—whether it’s a sole proprietorship, partnership, S-Corporation, or C-Corporation—can significantly affect your tax obligations.
I once worked with Dr. Steven, who had incorporated his practice as a C-Corporation without fully understanding how that could affect the tax implications of a sale. After discussing his options, we discovered that selling the assets of the practice, rather than the entire entity, could expose him to double taxation: once at the corporate level and again at the personal level when the proceeds were distributed.
This is where Practice Orbit can be a game-changer. Their platform connects dentists with experienced legal and financial advisors who specialize in dental practice sales, ensuring you know the best strategy for your specific business structure. This way, you can avoid costly tax mistakes like Dr. Steven’s and take home more of your hard-earned money.
3. Depreciation Recapture: A Hidden Tax Cost
When selling a dental practice, many dentists overlook the impact of depreciation recapture, which can lead to an unexpected tax liability. If you’ve been depreciating assets like equipment, furniture, or the building itself over the years, you may need to “recapture” that depreciation when selling your practice.
Dr. Michelle, another client of mine, had spent years upgrading her dental equipment, claiming depreciation on her taxes each year. When it came time to sell, she was surprised to learn that a portion of the sale would be taxed at a higher rate due to depreciation recapture.
Depreciation recapture applies to tangible assets that you’ve claimed depreciation on, and this amount is often taxed at a higher ordinary income tax rate rather than the more favorable capital gains tax rate. By working with Practice Orbit, you can structure the sale in a way that minimizes the impact of depreciation recapture, helping you keep more of your proceeds.
4. State and Local Taxes: Don’t Forget About Them
It’s not just the federal taxes you have to worry about when selling your dental practice—state and local taxes can also come into play. Some states, like California, have high capital gains and income tax rates that can add a significant burden to the sale of your practice.
I remember working with Dr. Amy, who was selling her practice in California. She was already prepared for federal taxes but had not considered the steep state capital gains taxes. This oversight could have cost her thousands, but with some planning, we were able to adjust the sale to reduce her state tax liability.
Practice Orbit can help you account for all tax obligations, including state and local taxes, so there are no surprises when it comes time to close the deal. By connecting with local experts, the platform ensures that you’re fully aware of your tax responsibilities at every level.
5. Planning Ahead: Deferring Taxes Through Installment Sales
Another option to reduce your tax burden when selling your dental practice is by using an installment sale. With an installment sale, you spread the payments—and thus the tax burden—over several years instead of taking a large tax hit all at once.
I worked with Dr. Chris, who wanted to sell his practice and retire early. By structuring his sale as an installment sale, he was able to receive payments over five years, reducing his annual tax burden and allowing him to enjoy a steady income in retirement.
Practice Orbit helps facilitate these kinds of creative solutions, giving you access to professionals who understand how to structure an installment sale in a way that benefits both you and the buyer.
Conclusion: Managing the Tax Burden When Selling a Dental Practice
So, how much tax do you pay when you sell a dental practice? The answer depends on how you structure your sale, the assets involved, your business entity, and even your state of residence. But with the right planning, you can reduce your tax liability and keep more of your hard-earned money.
Selling a dental practice is a complex transaction with many moving parts, but Practice Orbit provides the tools and expert connections you need to navigate these challenges. Whether it’s capital gains, depreciation recapture, or state taxes, Practice Orbit ensures you’re prepared to minimize your tax obligations and maximize your return.
If you’re considering selling your dental practice, I highly recommend taking the time to plan for the tax implications ahead of time. With the support of Practice Orbit, you can confidently tackle these challenges and focus on your next chapter with peace of mind.