Key Takeaways
- Deal structure and asset allocation directly determine how much you keep.
- Depreciation recapture can unexpectedly convert gains into ordinary income.
- Goodwill allocation is often the largest tax planning lever.
- Installment sales and timing strategies can shift tax exposure.
- Planning before signing an LOI preserves flexibility.
When a dentist sells a practice, the sale price can look impressive. However, what matters more is what remains after taxes.
Without careful planning, the structure of a practice sale can shift significant portions of the purchase price into higher-tax categories. The difference between a well-structured deal and a poorly planned one can mean hundreds of thousands of dollars in additional tax liability.
The U.S. Small Business Administration emphasizes that early tax planning should be a part of the selling process itself, not an afterthought once a buyer is in place. Yet many practice owners wait until negotiations are nearly complete before reviewing the tax consequences.
How the Deal Is Structured Determines How You’re Taxed
Most dental practice sales are structured as asset sales. That matters because the purchase price must be allocated among categories such as equipment, supplies, accounts receivable, and goodwill under Internal Revenue Code §1060. Both parties report this allocation using Form 8594.
Each category is taxed differently:
- Equipment may trigger depreciation recapture, taxed at ordinary income rates.
- Accounts receivable are typically taxed as ordinary income.
- Goodwill often qualifies for long-term capital gains treatment.
Because ordinary income rates are typically higher than capital gains rates, the allocation of purchase price directly affects what the seller ultimately keeps. By contrast, stock or membership interest sales are generally taxed more uniformly at capital gains rates, though buyers often prefer asset sales for their own tax benefits.
Deal structure is not a formality. It shapes the tax outcome.
Depreciation Recapture Can Increase Ordinary Income
Over time, most dentists have taken advantage of accelerated depreciation, Section 179 expensing, or bonus depreciation on equipment and improvements.
When those assets are sold, depreciation recapture rules may require part of the gain to be taxed at ordinary income rates rather than capital gains rates.
This can significantly increase the tax owed on the sale, particularly for practices with substantial equipment or recent capital investments.
Goodwill Is Often the Largest Planning Opportunity
In many dental practice sales, a substantial portion of the purchase price is attributed to goodwill, which is the value of the practice’s reputation, patient relationships, and ongoing operations. Goodwill is generally treated as a capital asset and may qualify for long-term capital gains treatment if held more than one year.
In some situations, sellers may also evaluate whether any portion of goodwill could be characterized as personal goodwill rather than entity goodwill, depending on the structure of the practice and existing agreements. Because goodwill is often the largest asset category in a dental transition, careful modeling of allocation scenarios before signing a letter of intent can materially affect after-tax proceeds.
Installment Sales May Spread the Tax Burden
Some practice transitions involve installment payments over several years. Under IRS installment sale rules (IRC §453), sellers may recognize gain proportionally as payments are received rather than all in the year of sale, though depreciation recapture is generally taxed upfront.
Spreading income across multiple years can:
- Help manage marginal tax brackets
- Improve cash flow planning
- Reduce the impact of a single high-income year
Installment structures can provide flexibility, but they also introduce risk if the buyer defaults, so tax strategy must be weighed alongside business considerations.
Your Entity Structure Affects the Outcome
Your business entity, whether an S corporation, C corporation, partnership, or sole proprietorship, plays a significant role in how sale proceeds are taxed.
For example:
- C corporations can face double taxation in certain sale structures, once at the corporate level and again when proceeds are distributed to shareholders.
- S corporations generally avoid double taxation, but may trigger built-in gains tax if the entity converted from a C corporation within the applicable recognition period.
- Partnerships and LLCs taxed as partnerships often allow more flexibility in allocating gains, but individual tax rates still apply to different asset categories.
Entity structure influences how gains are divided between ordinary income and capital gains and can affect buyer preferences and transition structure.
Timing the Sale Can Shift Tax Exposure
The calendar matters more than many practice owners realize. Closing in December versus January may shift gain recognition into a different tax year, and that can ripple through multiple areas of your financial life.
A significant gain in a single year may impact:
- Medicare premium calculations (IRMAA surcharges) two years later
- Net Investment Income Tax (NIIT) exposure under IRC §1411
- Phaseouts of deductions or credits tied to adjusted gross income
- Retirement contribution opportunities, including defined benefit or cash balance plan funding
- Charitable giving strategies, such as donor-advised funds or charitable trusts
Large one-time income events can also push you into higher marginal brackets, affecting not just the sale proceeds but also other income earned that year.
Coordinating the timing of your closing with retirement plan contributions or planned deductions can meaningfully affect the outcome. Even shifting a closing by a few weeks may change how income is reported and taxed.
What Texas Dentists Should Know About State Taxes
As you know, Texas does not impose a personal state income tax. For many practice owners, that’s a meaningful advantage when selling a business. However, state tax planning may still matter in certain situations. For example:
- If you previously practiced in a high-income-tax state and recently relocated
- If you plan to move out of Texas shortly before or after the sale
- If you own property or have business interests in other states
- If your transaction includes multi-state revenue streams
Residency is determined by more than where you intend to live. Factors such as voter registration, driver’s license, property ownership, and time spent in each state can affect how tax liability is evaluated.
For dentists who are considering relocation around retirement, coordinating the timing of a move with the timing of the sale can materially affect total tax exposure, even in a state without personal income tax.
Don’t Let Taxes Decide What You Keep
Selling a dental practice is one of the most significant financial decisions of your career. The difference between a smooth transition and a costly one often comes down to coordination between your CPA, your attorney, your broker, and your financial plan.
At Edwards & Associates, we work exclusively with dental practices. We understand how dental transitions are structured, how negotiations affect tax outcomes, and how to model different scenarios before a letter of intent is signed.
Our Transition Services team helps dentists:
- Model different sale structures before negotiations begin
- Evaluate asset allocation scenarios
- Coordinate with attorneys and brokers during the LOI stage
- Plan for retirement cash flow and post-sale tax strategy
- Align the transition timeline with long-term financial planning
Tax strategy should not be an afterthought once a buyer is in place. It should be part of the transition plan from the beginning.
If you are considering selling your practice, whether next year or five years from now, the best time to start planning is now. Contact us to schedule a transition planning consultation and ensure your sale is structured with your long-term goals in mind.