{"id":449,"date":"2026-10-01T05:09:12","date_gmt":"2026-10-01T05:09:12","guid":{"rendered":"https:\/\/dentaltransitions.com\/articles\/dental-practice-transition-tax-implications\/"},"modified":"2026-10-03T07:20:06","modified_gmt":"2026-10-03T07:20:06","slug":"dental-practice-transition-tax-implications","status":"publish","type":"post","link":"https:\/\/dentaltransitions.com\/articles\/dental-practice-transition-tax-implications\/","title":{"rendered":"Dental Practice Transition Tax Implications Explained"},"content":{"rendered":"<h2>Key Takeaways<\/h2>\n<ul>\n<li>\n<p>Purchase price allocation drives the tax outcome. Goodwill is taxed at capital gains rates, while equipment and some other assets are taxed at ordinary income rates.<\/p>\n<\/li>\n<li>\n<p>Shifting allocation toward goodwill before the LOI is signed can save tens of thousands in taxes because goodwill receives long-term capital gains treatment and equipment often triggers ordinary income rates up to 37%.<\/p>\n<\/li>\n<li>\n<p>Asset sales dominate dental transitions because buyers receive a stepped-up basis. Some sellers can use stock sales or Section 338(h)(10) elections, when entity structure allows, to convert more proceeds to capital gains.<\/p>\n<\/li>\n<li>\n<p>Installment sales can defer capital gains across years, while depreciation recapture is taxed in the year of sale. State rules differ widely between no-tax states such as Texas and high-tax states such as California.<\/p>\n<\/li>\n<li>\n<p>McLerran &amp; Associates helps negotiate purchase price allocation, structure earnouts with tax treatment in mind, and model multi-year after-tax proceeds so sellers see what is likely to land in their bank account.<\/p>\n<\/li>\n<\/ul>\n<p><a target=\"_blank\" rel=\"noopener noreferrer nofollow\" class=\"solid-button\" href=\"https:\/\/dentaltransitions.com\/contact-us\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Get a free tax-focused transition consultation with McLerran &amp; Associates.<\/a><\/p>\n<h2>What a Dental Practice Transition Actually Taxes<\/h2>\n<p>An asset sale, which is the most common structure in dental transitions, allocates the purchase price across seven statutory asset classes under IRC Section 1060. Both buyer and seller report this allocation on IRS Form 8594 (Asset Acquisition Statement). Each class has its own tax treatment, so the mix across classes can be one of the main factors that shapes the final tax bill.<\/p>\n<h3>Goodwill and Section 197 Intangibles<\/h3>\n<p><strong>Seller treatment:<\/strong> Long-term capital gains rates usually apply when the practice has been held more than 1 year. For 2026, the 20% long-term capital gains rate begins at taxable income above $545,500 for single filers and $613,700 for joint filers (Rev. Proc. 2025-32). A separate 3.8% Net Investment Income Tax (NIIT) under IRC Section 1411 can apply above $200,000 of modified adjusted gross income for single filers and $250,000 for joint filers, though a dentist who actively worked in the practice through closing generally is not passive and may escape the NIIT. Goodwill typically makes up 60\u201375% of the total purchase price in a general practice sale, so its capital gains treatment can be the single largest driver of after-tax proceeds.<\/p>\n<p><strong>Buyer treatment:<\/strong> Amortized straight-line over 15 years under IRC Section 197, regardless of how long the seller held the practice.<\/p>\n<h3>Equipment and Depreciation Recapture<\/h3>\n<p><strong>Seller treatment:<\/strong> Taxed as ordinary income to the extent of prior depreciation taken, under IRC Section 1245. Most dental equipment was expensed under Section 179 or bonus depreciation when purchased, so nearly every dollar allocated to equipment in a sale is recapture income, and this amount is taxed at ordinary income rates up to 37%. Any amount above original cost is capital gain.<\/p>\n<p><strong>Buyer treatment:<\/strong> Stepped-up basis, depreciable under MACRS and potentially eligible for Section 179 or 100% bonus depreciation under IRC Section 168(k) for property acquired after January 19, 2025.<\/p>\n<h3>Accounts Receivable and Supplies<\/h3>\n<p><strong>Seller treatment:<\/strong> Ordinary income. A cash-basis seller typically has no basis in receivables, so the full amount collected is ordinary income. Supplies are Class IV property, and the seller\u2019s basis is usually zero because supplies were deducted when purchased. Many dental practice sales leave receivables with the seller, who collects them after closing.<\/p>\n<p><strong>Buyer treatment:<\/strong> Supplies are deducted as consumed. Receivables, if assumed, are valued at expected collections.<\/p>\n<h3>Covenant Not to Compete<\/h3>\n<p><strong>Seller treatment:<\/strong> Ordinary income regardless of how the payment is labeled, because the IRS looks to economic substance rather than the label, and the seller is being paid to stay away rather than for an asset. The Second Circuit upheld ordinary income treatment for covenant not to compete payments in <em>Ullman v. Commissioner<\/em>.<\/p>\n<p><strong>Buyer treatment:<\/strong> A Section 197 intangible amortized over 15 years regardless of the covenant\u2019s actual contractual length. A 2-year and a 10-year non-compete are both amortized over the same 15 years.<\/p>\n<p>Both buyer and seller must file IRS Form 8594 with matching allocations. Inconsistent Form 8594 filings are a known IRS audit trigger. IRS Publications 544 (Sales and Other Dispositions of Assets), 551 (Basis of Assets), and <a target=\"_blank\" rel=\"noindex nofollow\" href=\"https:\/\/taxstra.com\/selling-a-dental-practice-taxes\">537 (Installment Sales)<\/a> are the main federal references for these rules.<\/p>\n<h2>Purchase Price Allocation in a Dental Practice Sale<\/h2>\n<p>Purchase price allocation is often the single biggest controllable tax lever in a dental practice sale. Many sellers leave this lever unused. The allocation is negotiated between buyer and seller, and a seller who does not address it during negotiation usually ends up with the split the buyer\u2019s advisors propose first.<\/p>\n<p>The seller generally prefers more value in goodwill (Class VII), which is taxed at capital gains rates. The buyer generally prefers more value in equipment (Class V) for faster bonus depreciation deductions. The covenant not to compete creates a different dynamic. It is ordinary income to the seller but a 15-year intangible for the buyer, so neither side has a strong incentive to inflate it. That reality can make shifting allocation away from the covenant and toward goodwill a relatively low-friction negotiating win for the seller.<\/p>\n<p>On a $3 million dental asset sale, shifting $550,000 from a non-compete allocation to goodwill reduces the estimated federal tax burden by approximately $73,000 on the same sale price. This shift is possible because both the covenant and goodwill amortize over 15 years for the buyer, so the buyer\u2019s deduction stream is identical regardless of which class receives the allocation.<\/p>\n<p>Under IRC Section 1060(a), an allocation the buyer and seller agree to in writing is binding on both parties unless the IRS determines it is not appropriate. The allocation works best when addressed before the LOI is signed and not left for the closing binder. A sell-side advisor negotiates allocation on the seller\u2019s behalf as part of the purchase agreement, before exclusivity locks in the buyer\u2019s preferred terms.<\/p>\n<p>The main tax levers in a sale include purchase price allocation, asset versus stock structure, installment reporting, entity structure, and the mix of DSO equity versus cash. Each lever has its own decision point and tax impact, so sellers benefit from mapping these decisions early in the process.<\/p>\n<h2>Asset Sale vs. Stock Sale in a Dental Practice Transition<\/h2>\n<p>Asset sales are far more common in dental transitions because buyers need the stepped-up basis to amortize goodwill and depreciate equipment. In an asset sale, the buyer purchases individual practice assets, receives a full stepped-up basis in every asset, and generally does not assume the seller\u2019s liabilities.<\/p>\n<p>In a stock or entity sale, the seller reports a single long-term capital gain on the difference between the sale price and their basis in the ownership interest. No depreciation recapture calculation applies at the entity-sale level. That structure can be favorable for the seller. However, the buyer inherits the entity\u2019s existing tax basis with no step-up, no new depreciation, and no fresh amortization on goodwill, and also inherits the entity\u2019s history including unknown liabilities. Buyers often respond with more extensive representations, warranties, and sometimes an indemnity escrow, and they frequently price entity sales lower.<\/p>\n<p>Entity structure shapes which path is available. A Section 338(h)(10) election under IRC Section 338 allows a buyer of an S-corporation dental practice to legally purchase stock, keeping the entity intact for payer contracts and provider credentialing, while the transaction is treated for tax purposes as a deemed asset sale. This treatment gives the buyer a stepped-up basis and the seller gain on the deemed asset sale. This election is not available for an LLC or PLLC taxed as a partnership and is made jointly on Form 8023 with the consent of the corporation\u2019s shareholders, including non-selling shareholders.<\/p>\n<p>For C-corporation practices, personal goodwill can be a planning tool. Personal goodwill is the value tied to the individual dentist\u2019s patient relationships, clinical reputation, and referral network rather than the entity. It can sometimes be sold directly by the dentist to the buyer outside the corporate entity, taxed once as capital gain, and avoid the double taxation that applies when the corporation sells goodwill as a corporate asset. The Tax Court in <em>Martin Ice Cream Co. v. Commissioner<\/em>, 110 T.C. 189 (1998), held that personal relationships of a shareholder-employee are not corporate assets when the employee has no employment contract with the corporation. The IRS has challenged aggressive personal goodwill claims, so the facts need to be genuine and documented before the practice is listed.<\/p>\n<h2>Installment Sales and Seller Financing: What Actually Defers<\/h2>\n<p><a target=\"_blank\" rel=\"noindex nofollow\" href=\"https:\/\/taxstra.com\/selling-a-dental-practice-taxes\">IRS Publication 537 (Installment Sales)<\/a> explains the installment method. Under IRC Section 453, an installment sale lets the seller recognize capital gain proportionally as payments arrive over the life of the note rather than all at once at closing. This approach can reduce the marginal rate in any given year and defer the 3.8% net investment income tax on gain not yet recognized.<\/p>\n<p>One critical limitation affects many dental sales. IRC Section 453(i) requires that depreciation recapture income be recognized in the year of disposition, so equipment recapture is taxed in year 1 even if the cash arrives over 5 or 10 years. A seller who finances a large portion of the price needs cash on hand to cover the recapture bill in year 1 while most proceeds are still arriving.<\/p>\n<p>Installment sales are common in traditional doctor-to-doctor transactions, often with seller financing through a promissory note. They are less typical in DSO transactions, where buyers generally have the capital to pay at close. Some states do not conform to federal installment sale rules and require the seller to recognize the full gain in the year of sale regardless of the payment schedule, so state tax review is essential before electing installment reporting. Interest on a seller note must be set at or above the IRS Applicable Federal Rate (AFR), and interest received is taxed as ordinary income. Whether installment treatment is even available can depend on how the practice is organized, which makes entity structure the next decision to examine.<\/p>\n<h2>Entity Structure and Timing<\/h2>\n<p>Entity structure, such as sole proprietorship, S-corporation, C-corporation, or partnership, shapes which sale path is available and how proceeds are taxed. This choice is a pre-sale decision with tax consequences that cannot be undone at closing. A dentist who plans to sell in 5 to 7 years can benefit from confirming that the entity structure supports a clean transaction, with current corporate records, an updated operating agreement for partnerships, clear title to assets, and documented personal goodwill.<\/p>\n<p>Splitting a sale across 2 tax years, such as closing in December versus January, can affect bracket management and estimated taxes. Estimated taxes on large liquidity events require careful quarterly planning, and safe harbor rules often require paying 110% of prior-year AGI if over $150,000. The Form 8594 matching requirement noted earlier also remains in play at this stage.<\/p>\n<p>For a deeper look at how valuation methods interact with entity structure, see <a target=\"_blank\" rel=\"noopener noreferrer nofollow\" href=\"https:\/\/dentaltransitions.com\/articles\/dental-practice-transition-valuation\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Dental Practice Transition Valuation: Methods Explained<\/a>. For transition planning timelines, see <a target=\"_blank\" rel=\"noopener noreferrer nofollow\" href=\"https:\/\/dentaltransitions.com\/articles\/dental-practice-transition-timeline\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Ideal Timeline to Plan a Dental Practice Transition and Sale<\/a>.<\/p>\n<h2>How DSO Equity and Earnouts Are Taxed<\/h2>\n<p>DSO deals often have more moving parts than doctor-to-doctor sales, and the tax outcome depends heavily on how the deal is constructed. As much as 40% of a DSO deal can be paid in equity rather than cash, so a seller receiving a headline price may receive far less than that amount in cash at close.<\/p>\n<p>Equity can be held at 2 levels, each with different economics. Joint-venture (JV) level equity typically comes with distributions and a higher floor but a lower ceiling. Holding-company level equity carries no distributions but a higher ceiling that can multiply several times over a 3-, 5-, 7-, or 10-year horizon, depending on when the DSO\u2019s private equity sponsor executes a recapitalization or sale. Hold periods for platforms have stretched to 8 to 10 years in recent cycles, which affects the timing and value of a rollover equity second bite.<\/p>\n<p>Much of a DSO deal can qualify for long-term capital gains rates rather than ordinary income, but the mix of cash, equity, and earnout determines the actual outcome. The rollover equity itself usually triggers no taxable event at sale, and basis carries over. Future liquidity from retained equity is generally taxed at long-term capital gains rates if held long enough.<\/p>\n<p>Earnouts require careful structuring. Earnout payments tied to the selling dentist\u2019s individual production and requiring continued employment are structurally likely to be recharacterized as ordinary compensation income rather than capital gain. Earnouts tied to practice-wide EBITDA or collections are more likely to qualify for capital gain treatment than earnouts tied to the individual dentist\u2019s chair production. The deal documents determine the tax character, so the structure of earnout provisions works best when negotiated before the LOI is signed.<\/p>\n<p>McLerran &amp; Associates prepares multi-year, multi-structure financial forecasting and cash-flow modeling so the owner can compare real after-tax proceeds across deal structures and time horizons, including conservative recapitalization assumptions, before choosing a path.<\/p>\n<h2>Dental Practice Transition Tax Implications in Texas and California<\/h2>\n<p>State tax rules can shift after-tax proceeds by hundreds of thousands of dollars on the same deal. Texas and California illustrate how wide the range can be.<\/p>\n<p><strong>Texas:<\/strong> Texas has no state personal income tax, and since November 2025 the Texas constitution also bans a tax on an individual\u2019s capital gains, so a dental practice seller in Texas owes no state tax on the sale gain. The tax analysis focuses on federal rules such as asset versus stock treatment, purchase price allocation, and depreciation recapture. Even without state income tax on the gain, a Texas dental practice entity that closes after an asset sale must file a final franchise tax report with the Texas Comptroller within 60 days.<\/p>\n<p><strong>California:<\/strong> California taxes a dental practice sale gain as ordinary income with no preferential capital gains rate. Combined with the up-to-20% federal long-term capital gains rate and the 3.8% Net Investment Income Tax, the effective rate on long-term gains in California can exceed 37%. California also imposes a 1.5% entity-level tax on S-corporation net income, including the gain from an asset sale, which creates an additional layer of state tax before proceeds reach the seller. California never conformed to federal bonus depreciation and caps Section 179 at $25,000, so a California seller\u2019s state depreciation schedule and state-level Section 1245 recapture can differ materially from the federal numbers.<\/p>\n<p>A California dentist might net $200,000\u2013$250,000 less than a Texas dentist on the same deal. Rules vary by state, and a dental-specific CPA familiar with your state\u2019s conformity rules is helpful before finalizing any allocation or installment election. Those state-level differences are one reason the following strategies need to be tailored to each seller\u2019s situation.<\/p>\n<h2>How to Minimize Taxes When Selling a Dental Practice<\/h2>\n<p>Several planning strategies can reduce the tax impact of a sale when they are addressed early. These approaches rely on existing law and require action well before the LOI is signed.<\/p>\n<ul>\n<li>\n<p><strong>Negotiate allocation toward goodwill.<\/strong> Every dollar moved from a non-compete or equipment allocation to goodwill reduces the seller\u2019s effective tax rate on that dollar. Address allocation in the purchase agreement so the Form 8594 filing reflects the agreed split.<\/p>\n<\/li>\n<li>\n<p><strong>Consider installment sales where recapture allows.<\/strong> Spreading capital gains across tax years can keep the seller in a lower bracket in any given year and defer NIIT on unrecognized gain. Depreciation recapture cannot be deferred and is taxed in year 1 regardless, so cash planning remains essential.<\/p>\n<\/li>\n<li>\n<p><strong>Time the sale across tax years.<\/strong> Closing in one tax year versus another can affect bracket management and estimated tax obligations. Modeling both scenarios with a CPA before setting a closing date can clarify which year produces a better outcome.<\/p>\n<\/li>\n<li>\n<p><strong>Choose the right entity structure before going to market.<\/strong> C-corporation sellers with genuine personal goodwill facts may reduce double taxation. S-corporation sellers with a corporate buyer may benefit from a Section 338(h)(10) election. These decisions often require 2\u20135 years of advance planning.<\/p>\n<\/li>\n<li>\n<p><strong>Model DSO equity and earnout structures over the full horizon.<\/strong> A deal with more cash at close and less equity can sometimes net more after tax than a higher headline price with a large earnout tied to individual production. Multi-year modeling helps compare structures on an apples-to-apples basis.<\/p>\n<\/li>\n<li>\n<p><strong>Avoid large equipment purchases in the final 2 years before sale.<\/strong> New equipment rarely raises goodwill-based valuation enough to offset the tax cost and can create depreciation recapture, so a $60,000 scanner purchased the year before selling can become a $60,000 ordinary income item at closing if expensed under Section 179 or bonus depreciation.<\/p>\n<\/li>\n<\/ul>\n<p>Consult a dental-specific CPA and a healthcare transaction attorney before signing an LOI. The decisions that most affect after-tax outcome are usually made well before the closing table. With the planning strategies covered, it helps to step back and see how the consequences break down for each side of the table.<\/p>\n<h2>Tax Consequences of Selling a Dental Practice<\/h2>\n<p>For the seller, the tax consequences of a dental practice asset sale are determined asset class by asset class. Goodwill, which is often the largest component, is taxed at long-term capital gains rates. Equipment is taxed as ordinary income to the extent of prior depreciation taken under IRC Section 1245. The covenant not to compete is ordinary income. Supplies are ordinary income. Accounts receivable, if retained by the seller and collected post-close, are ordinary income for a cash-basis seller.<\/p>\n<p>For the buyer, the tax consequences run in the opposite direction. The buyer receives a stepped-up basis in every asset, fresh depreciation on equipment (potentially 100% in year 1 under bonus depreciation), and the same 15-year amortization discussed earlier on goodwill and other Section 197 intangibles. The buyer\u2019s deduction stream on the covenant not to compete and goodwill is identical because both amortize over 15 years, which is why shifting allocation from the covenant to goodwill is buyer-neutral and seller-favorable.<\/p>\n<p>For a comprehensive look at how these tax consequences interact with succession planning costs, see <a target=\"_blank\" rel=\"noopener noreferrer nofollow\" href=\"https:\/\/dentaltransitions.com\/articles\/dental-practice-succession-planning-cost\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Dental Practice Succession Planning Cost: 2026 Guide<\/a>.<\/p>\n<h2>How Specialty Affects Transition Tax Exposure<\/h2>\n<p>The tax mechanics described in this guide apply across dental specialties. Specialty can affect the size of the tax bill because it influences buyer demand and the total proceeds subject to tax, but the core rules around allocation, recapture, and entity structure remain the same.<\/p>\n<p>Specialty practices can have unique items that affect allocation. Orthodontic practices with patients partway through treatment may recognize receivables as ordinary income as collected or transfer them to the buyer as part of the purchase price, depending on how the contract is structured. The allocation of in-progress treatment plans works best when addressed explicitly in the purchase agreement and reflected on Form 8594.<\/p>\n<p>For more on how specialty affects the transition process, see <a target=\"_blank\" rel=\"noopener noreferrer nofollow\" href=\"https:\/\/dentaltransitions.com\/articles\/dental-practice-succession-planning\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Dental Practice Succession Planning For Owner-Dentists<\/a>.<\/p>\n<h2>Why McLerran &amp; Associates<\/h2>\n<p>McLerran &amp; Associates is a dental-only sell-side advisor and advocate, and its client is always the practice owner. For roughly 35 years, the firm has guided dentists through 2 main transition pathways: selling to another dentist in a doctor-to-doctor deal, and affiliating with a DSO or private equity partner. Today its work splits almost evenly between the two, which gives owners a practical side-by-side comparison that single-lane brokers may not provide.<\/p>\n<figure style=\"text-align: center;\"><img src=\"https:\/\/cdn.aigrowthmarketer.co\/1782231581955-2aa75d9d4697.jpeg\" alt=\"McLerran &amp; Associates team: McLerran is the nation's largest dental-specific sell-side M&amp;A advisory and brokerage firms\" style=\"max-height: 500px;\" loading=\"lazy\" decoding=\"async\"><figcaption><em>McLerran &amp; Associates team: McLerran is the nation&#8217;s largest dental-specific sell-side M&amp;A advisory and brokerage firms<\/em><\/figcaption><\/figure>\n<p>Each engagement starts with a CPA-led, diligence-grade EBITDA analysis. This level of work helps control the narrative around profitability and reduces the risk of a buyer re-trading the deal after reviewing the numbers. From that foundation, McLerran creates competition. The firm runs a structured, auction-like bid process among a vetted pool of well-qualified buyers. The process typically takes 45\u201360 days and generates multiple offers.<\/p>\n<figure style=\"text-align: center;\"><img src=\"https:\/\/cdn.aigrowthmarketer.co\/1782231605342-03c5ed4725a3.jpeg\" alt=\"At McLerran &amp; Associates, every engagement is built on an ironclad, CPA-led EBITDA analysis and practice valuation.\" style=\"max-height: 500px;\" loading=\"lazy\" decoding=\"async\"><figcaption><em>At McLerran &amp; Associates, every engagement is built on an ironclad, CPA-led EBITDA analysis and practice valuation.<\/em><\/figcaption><\/figure>\n<p>On the tax side, McLerran negotiates purchase price allocation on the seller\u2019s behalf, structures earnout provisions with capital gains treatment in mind, and prepares multi-year, multi-structure financial forecasts so the owner can compare after-tax proceeds across deal structures before choosing a path.<\/p>\n<figure style=\"text-align: center;\"><img src=\"https:\/\/cdn.aigrowthmarketer.co\/1782231776232-426cf610db07.jpeg\" alt=\"A chat at McLerran &amp; Associates: the dental-specific sell-side advisor and advocate for practice owners guides on how, when, and to whom to sell your practice.\" style=\"max-height: 500px;\" loading=\"lazy\" decoding=\"async\"><figcaption><em>A chat at McLerran &amp; Associates: the dental-specific sell-side advisor and advocate for practice owners guides on how, when, and to whom to sell your practice.<\/em><\/figcaption><\/figure>\n<p>DIY sales, local generalist brokers, multi-vertical advisors, and free-valuation lead-generation firms can leave the seller at an information disadvantage against sophisticated buyers who negotiate these deals every week. McLerran focuses on leveling that table and structuring the deal to protect what is likely to land in the seller\u2019s bank account.<\/p>\n<p>Owners who are still deciding whether to sell can also learn in a non-transaction setting. The McLerran M&amp;A Summit (October 29\u201330, 2026, Austin) offers education before any decision is made, with 4 CE credits and a complimentary $2,500 practice valuation included.<\/p>\n<p>For more on the full transition process, see <a target=\"_blank\" rel=\"noopener noreferrer nofollow\" href=\"https:\/\/dentaltransitions.com\/articles\/dental-practice-transition-checklist-steps\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Dental Practice Transition Checklist: A 12-Month Guide<\/a> and <a target=\"_blank\" rel=\"noopener noreferrer nofollow\" href=\"https:\/\/dentaltransitions.com\/articles\/dental-practice-retirement-planning\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Dental Practice Retirement: Make Your Practice Sale Count<\/a>.<\/p>\n<p><a target=\"_blank\" rel=\"noopener noreferrer nofollow\" class=\"solid-button\" href=\"https:\/\/dentaltransitions.com\/contact-us\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Talk to a dental-only sell-side advisor about your tax strategy.<\/a><\/p>\n<h2>Frequently Asked Questions<\/h2>\n<h3>What Are the Tax Implications of a Dental Practice Transition?<\/h3>\n<p>A dental practice transition is a taxable event. In an asset sale, which is the dominant structure, the seller pays long-term capital gains rates on goodwill, ordinary income rates on equipment depreciation recapture under IRC Section 1245, ordinary income on supplies, and ordinary income on the covenant not to compete. The actual outcome depends on how the purchase price is allocated across asset classes on IRS Form 8594, the seller\u2019s entity structure, the state where the practice is located, and whether installment sale treatment applies to any portion of the proceeds. No single rule determines the tax outcome, so the result reflects multiple decisions, most of which are made before the closing table.<\/p>\n<h3>Who Controls Purchase Price Allocation?<\/h3>\n<p>Both buyer and seller must report matching allocations on IRS Form 8594, so allocation is negotiated as part of the purchase agreement. The seller generally wants more value in goodwill for capital gains treatment, and the buyer generally wants more in equipment for faster depreciation deductions. A seller who does not push on allocation during negotiation typically ends up with the split the buyer\u2019s advisors proposed first. A sell-side advisor negotiates allocation on the seller\u2019s behalf, and the allocation works best when addressed before the LOI is signed rather than left for the closing binder. An agreed written allocation is binding on both parties under IRC Section 1060(a) unless the IRS determines it is not appropriate.<\/p>\n<h3>Is an Asset Sale or Stock Sale Better for the Seller?<\/h3>\n<p>Asset sales are the dominant structure in dental transitions because buyers receive a stepped-up basis in all acquired assets, which allows fresh depreciation on equipment and a new 15-year amortization clock on goodwill. Stock or entity sales can convert more proceeds to capital gains for the seller because there is no depreciation recapture calculation at the entity-sale level. Buyers inherit the entity\u2019s existing tax basis and unknown liabilities in a stock or entity sale, which typically reduces the price they are willing to pay. Entity structure shapes which path is available. A Section 338(h)(10) election can allow an S-corporation buyer to purchase stock while the transaction is treated as a deemed asset sale for tax purposes, but this election is not available for LLCs or PLLCs taxed as partnerships. The right answer depends on the seller\u2019s entity structure, the buyer\u2019s profile, and the specific facts of the deal.<\/p>\n<h3>How Does Depreciation Recapture Work in a Dental Practice Sale?<\/h3>\n<p>Under IRC Section 1245, equipment sale proceeds are taxed as ordinary income to the extent of prior depreciation taken. Because most dental equipment is expensed under Section 179 or bonus depreciation when purchased, nearly every dollar allocated to equipment in a sale is recapture income, which is taxed at ordinary income rates up to 37% rather than at capital gains rates. Any amount above the original cost of the equipment is capital gain.<\/p>\n<h2>Read Next<\/h2>\n<ul>\n<li>\n<p><a target=\"_blank\" rel=\"noopener noreferrer nofollow\" href=\"https:\/\/dentaltransitions.com\/articles\/sell-and-stay-dental-transition\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Sell and Stay Dental Transition: Private Buyer vs. DSO<\/a><\/p>\n<\/li>\n<li>\n<p><a target=\"_blank\" rel=\"noopener noreferrer nofollow\" href=\"https:\/\/dentaltransitions.com\/articles\/dental-practice-retirement-planning\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Dental Practice Retirement: Make Your Practice Sale Count<\/a><\/p>\n<\/li>\n<li>\n<p><a target=\"_blank\" rel=\"noopener noreferrer nofollow\" href=\"https:\/\/dentaltransitions.com\/articles\/dental-practice-succession-planning-checklist\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Dental Practice Succession Planning Checklist<\/a><\/p>\n<\/li>\n<li>\n<p><a target=\"_blank\" rel=\"noopener noreferrer nofollow\" href=\"https:\/\/dentaltransitions.com\/articles\/dental-practice-succession-planning\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Dental Practice Succession Planning for Owner-Dentists<\/a><\/p>\n<\/li>\n<li>\n<p><a target=\"_blank\" rel=\"noopener noreferrer nofollow\" href=\"https:\/\/dentaltransitions.com\/articles\/dental-practice-transition-valuation\/?utm_source=ai-growth-agent&#038;utm_term=dental-practice-transition-tax-implications\">Dental Practice Transition Valuation: Methods Explained<\/a><\/p>\n<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Understand the tax implications of selling your dental practice. McLerran &#038; Associates offers expert guidance to help you keep more at closing.<\/p>\n","protected":false},"author":1,"featured_media":448,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-449","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/dentaltransitions.com\/articles\/wp-json\/wp\/v2\/posts\/449","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/dentaltransitions.com\/articles\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/dentaltransitions.com\/articles\/wp-json\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/dentaltransitions.com\/articles\/wp-json\/wp\/v2\/comments?post=449"}],"version-history":[{"count":2,"href":"https:\/\/dentaltransitions.com\/articles\/wp-json\/wp\/v2\/posts\/449\/revisions"}],"predecessor-version":[{"id":727,"href":"https:\/\/dentaltransitions.com\/articles\/wp-json\/wp\/v2\/posts\/449\/revisions\/727"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/dentaltransitions.com\/articles\/wp-json\/wp\/v2\/media\/448"}],"wp:attachment":[{"href":"https:\/\/dentaltransitions.com\/articles\/wp-json\/wp\/v2\/media?parent=449"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/dentaltransitions.com\/articles\/wp-json\/wp\/v2\/categories?post=449"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/dentaltransitions.com\/articles\/wp-json\/wp\/v2\/tags?post=449"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}