Tax Considerations when Buying or Selling a Dental Practice – Part 3
In our last article we looked at the tax considerations related to assets sold as part of the practice sale. Today in our last article we look at how to structure the sale of the dental practice transition
With the framework from the previous two articles, it is easy to see the importance of properly allocating the purchase price among the assets sold.
1. Stock Sale v. Asset Sale
When selling a business there are a couple of ways it can be structured. They buyer can purchase the stocks of the company, or sell the individual assets of the company.
a. Asset Sale
In an asset sale, the buyer and seller pick and choose which assets and liabilities the company will transfer to the buyer. In this case, the sale is directly from the company to the buyer, not from the individual that owns the selling company. The payment for the company’s assets must then be transferred to the seller from the company in the form of a distribution. The result of this is that the seller gets taxed twice, once at the corporate level, and again on an individual level. This is not advantageous to a seller. However, buyers benefit as they receive a “step-up” in the basis for the property they are acquiring. Under IRC §1012(a) a buyer’s basis in property is the cost of the property rather than the seller’s depreciated basis.
b. Stock Sale
Under a stock sale the owner simply sells the shares or membership interest in the company. The buyer gets everything; all the assets and all the liabilities at their current basis. The benefit to the seller is that unlike an asset sale the seller is only taxed once at the capital gains rate. The disadvantage to the buyer is that the company’s assets retain their depreciated basis. As the basis of the property prior to the sale is likely to be lower than its fair market value the buyer will be unable to take further depreciation deductions and will be eventually have a larger amount realized.
2. Purchase Price Allocation
The end result of this illustrates the importance of negotiation over the fair market value of each of the company’s assets and the allocation of the purchase price between the assets and goodwill of the company as well as any accompanying non-compete covenants. Because of the various tax ramifications of purchase price allocation, it leaves room for give and take between the buyer and seller. A buyer may be willing to pay more for a practice if the buyer is allowed to allocate more towards the asset end whereas a seller may accept a lesser purchase price if the seller is able to push the allocation onto a lower taxed asset such as goodwill.
3. 1031 Exchange
IRC §1031 allows a taxpayer to “exchange” “business or investment” property for a “like kind” property without paying tax. There are three elements that must be met in order to swap out one business property for another without recognizing any gain on the sale. If a practitioner is moving and has to leave a practice, but does not plan on retiring a 1031 Like-Kind-Exchange is a good option. We have an extensive prior series on 1031 Exchanges that provides plenty of information on structuring such a deal.
We hope that you will find this Article helpful in your business. Please feel free to forward this Article on to anyone that you think may benefit from this information. As always, if you have any questions or comments, you can contact us at firstname.lastname@example.org or email@example.com or if you need a consultation for any legal issues, you can call our office at (916) 966-2260 for an appointment at our Gold River headquarters or our Lincoln satellite office.
This article is not intended to be legal advice, and should not be taken as legal advice. Every case requires review of specific facts and history, and a formal agreement for service. Please feel free to contact us if you need legal advice and are interested in seeing if we can help you.