How Much of My Practice Sale Goes Towards Taxes? (And How to Keep More of It)

When most dentists think about selling their practice to a fellow dentist or a DSO, they fixate on one number: the sales price. That’s the headline figure that represents a lifetime of work. But the number that truly matters is what is left after the IRS takes its share. With proper planning, you can minimize the gap between these two numbers more than most sellers realize.

It’s important to be direct: there is no version of this where the IRS gets nothing. You are going to pay tax on the sale of your practice. What is very much in play is how much. Tax is levied on your gain: the sales price, less your tax basis in the assets sold and qualifying transaction costs. The tax rate applied depends on the type of assets sold and the allocation among them. This article walks through the levers that affect taxes and how you and your advisors can exert some control over this figure.

Start with the Asset Allocations

Nearly every dental practice sale, whether to another dentist or to a DSO, is structured as an asset sale rather than an equity/stock sale. In an asset sale, the IRS treats your practice as a collection of assets (equipment, goodwill being two major categories) and applies a different tax rate to each asset. During sale negotiations, the buyer and seller agree upon the amount of the sales price that is allocated towards tangible vs. intangible assets. Both you and your buyer are required to file IRS Form 8594, reporting the purchase price and how this price was divided among these assets, and the two filings have to match.

The allocation of this purchase price is the most important tax lever in your transaction. If you and your advisors get it right, it can ensure your proceeds are taxed at the lowest rates the tax code allows. Get it wrong, and your tax bill can increase considerably.

Tangible vs. Intangible Assets & Why the Difference Matters

Your practice’s assets fall into two broad buckets, and the tax code treats them differently.

Tangible assets are the physical things — your chairs, your CBCT and digital sensors, operatory equipment, and computers. While you own the practice, you are able to expense (via depreciation) the cost of these tangible assets over their useful life (or sometimes much more quickly if you elect Section 179 or bonus depreciation). By the time of sale, you likely have depreciated the vast majority of these assets, meaning the tax basis of these assets is low and the taxable gain is high. The portion of the sales price allocated towards tangible assets, less any tax basis you still have in those assets and allowable transaction costs, is taxed at ordinary income tax rates (as high as 37% federally).

Intangible assets are items such as goodwill: the value of your reputation, your patient relationships, your location, and the ongoing, profitable enterprise you have built. Goodwill is a capital asset typically taxed at long-term capital gains rates (15-20% federally). Other intangible assets include the covenant not to compete, which is taxed at ordinary income tax rates (but ideally assigned a low value in the asset allocation).

Put the spread in dollars and it’s easy to see why these allocations matter. On a $1,000,000 allocation, the difference between 37% ordinary treatment and 20% capital gains treatment is $170,000. These rates are federal only; state income tax may apply on top of these figures.

So Why Not Just Allocate Everything to Intangible Assets?

The tension at play here is that, while the seller prefers to allocate as much as possible to intangible assets, the buyer prefers to allocate as much as possible to tangible assets. Any amounts allocated towards tangible assets can be depreciated by the buyer over 5-7 years (possibly as much as 100% depreciated in Year 1). Any amounts allocated towards intangible assets would be amortized by the buyer over 15 years. In the first five years after the sale, buyers can be very income sensitive. This is often the period where they are trying to simultaneously build a practice, grow a family, purchase a home, and save for retirement, while living a lifestyle they can be proud of. Buyers therefore prefer to save as much on taxes in these early years. Allocating as much as possible to tangible assets helps them do so.

Where Deals Actually Land

So how is the line drawn? While the IRS requires the allocation to reflect the fair market value of the assets, in practice (as long as the buyer and seller report the same allocations to the IRS) these allocations are typically determined based on negotiations between the buyer and seller.

Industry-wide, we typically see doctor-to-doctor sales contain allocations around 75% intangible and 25% tangible. On the DSO side, we typically see allocations around 80% intangible and 20% tangible. We focus on achieving meaningfully better allocations than these averages for our clients. Our doctor-to-doctor sellers often land in the 80–85% intangible range, and our DSO clients often land in the 85–90% intangible range.

Obtaining these percentages, which often requires negotiating leverage, proper positioning, and expertise, can move the needle significantly. It’s also important to note that any broker commissions and attorney/accounting fees paid as part of the sale will serve to reduce your taxable gain. In other words, a portion of these fees comes back to you as tax savings of roughly 20% to 37% of what you pay.

One Landmine for Incorporated Sellers

If your practice is organized or taxed as a C corporation, the same dollars can be taxed twice. In a straight asset sale out of a C-Corp, the corporation pays tax on the gain first, and then you pay tax a second time when you move that money out of the corporation and into your own hands. On a large deal, that double layer can push your effective rate toward 40%.

If your practice is owned through a C-Corp, properly structuring and allocating personal goodwill is extremely important: amounts properly allocated to personal goodwill are not double taxed. Personal goodwill is not automatic, though — it must be supported by the facts, most importantly that no prior non-compete or employment agreement assigned your goodwill to the corporation.

The DSO Question We Hear Most: “Will I Be Taxed on the Whole Deal If I Only Get Part of It in Cash?”

This is the single most common tax question we field from clients weighing a DSO offer. In most DSO transactions you do not walk away with 100% cash. Rather, you take a large share (typically 50-80%) of the sales price in cash at close, with the remaining amounts rolled into equity in the practice (Joint Venture or JV equity), shares of the DSO buyer (HoldCo Equity), or an earn-out based on your continued employment or maintenance of practice performance. A seller would understandably be worried about paying taxes on the full sales price rather than just the portion they receive in cash.

When the deal is structured correctly (which requires diligent, experienced advisors), you are typically taxed only on the cash you actually receive at close — not on the equity you roll. The cash you take out is treated as the taxable sale; the equity you roll can be treated as a tax-deferred investment, taxed later when you sell that equity in a recapitalization event or to another buyer. Whether this deferral is available depends partly on the buyer’s structure: most DSO platforms hold practices in LLCs taxed as partnerships, where rollovers are generally tax-deferred without the ownership-control test that applies to rolling into corporate stock.

Some of this depends on your current tax structure. If your practice is taxed as an S-corporation, the rollover usually cannot be done without some pre-sale restructuring. The common fix is an “F reorganization,” where your advisors form a new S-Corp holding company above your existing entity, and the practice drops down into a disregarded LLC underneath it. Your S election does not go away (it moves up to the holding company) and the LLC is what satisfies the rollover rules. This is done commonly, but it must be done properly, in advance of closing, with advisors that know what they are doing.

Other Strategies, But Not One-Size-Fits-All

Asset allocation is the primary lever inside the deal to mitigate taxes. Outside the deal, there are vehicles that can spread or defer your tax further, but they require real lead time and the right specialist to evaluate, plan, and execute.

One option is structuring the deal as an installment sale. You take your proceeds over several years, which spreads the gain, defers the taxes, and can keep you in lower tax brackets. A close cousin, the structured installment sale, runs those payments through a highly rated, independent third party, which reduces the seller’s exposure to any credit risk associated with the buyer.

Another option, for the charitably inclined, is a charitable remainder trust. Before going to market, you transfer assets to an irrevocable trust. The trust can generally sell the assets without paying immediate tax, allowing the proceeds to remain invested while the trust makes distributions to you for life or for a specified term. You receive an upfront tax deduction based on the projected value that will ultimately pass to charity. As distributions are made to you, however, they may carry taxable income or capital gains, so this can primarily be a tax-deferral strategy (rather than a tax-elimination strategy). The tradeoff is irrevocable: whatever remains in the trust at the end of the payment term passes to the charity you select rather than to your heirs.

Finally, for sellers with significant investable assets and sufficient planning runway prior to a sale, a tax-aware long/short account can systematically generate both capital gains and capital losses across a diversified portfolio. The stocks carrying capital losses can be sold to offset capital gains from your practice sale, while the rest of your portfolio keeps growing with gains deferred until sold. While this is primarily a tax-deferral strategy, the deferred tax can even disappear entirely if you hold those assets until death, when your heirs receive a stepped-up basis. This strategy requires meaningful capital, can carry market and leverage risk, and requires sufficient lead time. It can be effective, but it is not right for everyone.

Start Before You Have a Buyer

The common thread: all of these need to be in motion well before you sign. This is why it’s important to engage a firm like McLerran & Associates for a comprehensive valuation a few years out from a sale. Beyond establishing what your practice is worth today, an early valuation lets our team identify specific opportunities to grow your profitability and practice value over your final years of ownership, and to put the tax-planning strategies above in motion with enough runway to actually work. The earlier we are engaged, the more value we can help you build before the sale and keep after it.

If you have found a buyer on your own, there are a few things you will want to address BEFORE signing a Letter of Intent (LOI). The initial priorities include your tax structure (entity type, whether personal goodwill needs to be carved out, and how any rollover equity will be handled), the key legal terms, asset allocations, the non-compete, your post-sale employment and workback terms, among other items. Most importantly, though, you will want to make sure you are receiving fair market value for the sale. Most LOIs our clients receive from a buyer (especially on the DSO side) come in significantly below what could be achieved if you run a competitive bidding process with multiple qualified buyers alongside an experienced advisor. We regularly see unsolicited offers come in 20–40% below what that kind of process delivers.

Our Track Record

This is what we do, every day. We take pride in educating our clients on all of their options: holding & focusing on growth, selling via a doctor-to-doctor sale, or choosing to affiliate with a DSO. McLerran & Associates performs more than 400 valuations and 60 practice sales annually, and structuring those deals for the best possible after-tax outcome is built into how we work — not bolted on at the end. With two CPAs on staff, 150+ combined years of dental industry experience, hundreds of deals advised on each year, and relationships with best-in-class tax, legal, and financial specialists, we are uniquely positioned to help you navigate the tax side of your sale. Our clients see well above average results in their sales price, but we do not just get you a strong sales price. We help you keep more of it.

The Bottom Line

The sales price is what you negotiate. The after-tax number is what you actually keep for all the blood, sweat, and tears you poured into your practice over the years. The difference between a practice sale structured with taxes in mind from the beginning and one that was not can be measured in hundreds of thousands or (for large practices) millions of dollars. The earlier you start planning, the more of that number you keep. So, whether you are one year or one decade away from a sale, reach out well in advance so we can make sure you are receiving (and keeping) as much as possible from your life’s work.

This article is for general informational purposes only and is not tax or legal advice. Consult your CPA and attorney about your specific situation.