Buying Into (or Out of) a Dental Practice: Tax Fundamentals
Buying or selling a dental practice can be one of the largest financial decisions of your career. The purchase price matters, but so does the way the deal is structured. Two agreements with the same price can leave the seller with different tax bills and give the buyer different deductions.
Consider two hypothetical asset purchases for $1.2 million. Deal A assigns more of the price to goodwill; Deal B assigns more to equipment. For this illustration, assume the seller pays 37% on the equipment gain and 20% on the goodwill gain.
| Item | Deal A More goodwill | Deal B More equipment |
|---|---|---|
| Total purchase price | $1,200,000 | $1,200,000 |
| Price assigned to equipment | $300,000 | $600,000 |
| Price assigned to goodwill | $900,000 | $600,000 |
| Seller’s illustrative federal tax | $291,000 | $342,000 |
| Buyer’s first-year equipment deduction | $300,000 | $600,000 |
| Buyer’s first-year goodwill deduction | $30,000 | $20,000 |
| Buyer’s total first-year deduction | $330,000 | $620,000 |
At the same purchase price, Deal B gives the buyer $290,000 more in first-year deductions and leaves the seller with $51,000 more in illustrative federal tax. The buyer's tax savings depend on the tax rate and ability to use those deductions. The allocation must reflect supportable asset values; the parties cannot simply move dollars around to get the tax result they prefer.
Assumptions: An individual seller has no remaining tax cost in either asset. Prior equipment depreciation covers the full equipment gain, and the seller created and held the goodwill for more than a year. The buyer acquires and begins operating the practice in July 2026 and uses a calendar tax year. Qualifying equipment goes into use that month and is fully deducted through 100% bonus depreciation. Goodwill is deducted over 15 years, with six months allowed in the first year. This simplified comparison excludes state and other taxes, fees, financing, and limits that could delay the buyer’s deductions. The assumed rates illustrate the difference; they are not a full tax return calculation.
Bring your CPA and attorney into the discussion before the main terms are settled. The tax consequences are much easier to address while the agreement is still being negotiated.
Buying assets or buying the entity
In an asset purchase, the buyer purchases specified items, such as equipment, supplies, goodwill, and receivables. The buyer generally establishes a new tax basis in those assets, which affects future deductions.
An asset deal can limit how many of the seller's old obligations the buyer takes on. In Ohio, the buyer may have to hold back enough of the purchase price to cover unpaid commercial activity, sales, and use taxes until the seller provides a state receipt showing payment or a certificate that no tax is due. Failing to withhold can leave the buyer responsible for those taxes. Have your attorney address these requirements before closing.
In a stock purchase, the buyer acquires the corporation itself. A seller may prefer this because the gain is often taxed as capital gain, while the buyer generally doesn't get a fresh tax basis in the corporation's individual assets. An LLC or partnership interest sale follows different rules and can include income taxed at ordinary rates.
The practice's tax classification matters as much as its legal name. Compare the after-tax result for both sides before treating an asset sale or an ownership-interest sale as the obvious choice.
The allocation of the price matters
In a qualifying business asset sale, the purchase price is divided among the assets being sold. Both parties generally report the allocation on Form 8594, and their reporting should be consistent with the agreement.
Equipment may give the buyer faster deductions, but it can create ordinary income for the seller when earlier depreciation deductions are recovered through the sale. Receivables and inventory can also produce ordinary income.
Goodwill often receives more favorable capital gain treatment for the seller, although exceptions apply. The buyer generally deducts acquired goodwill and many related intangible assets over 15 years. A noncompete connected with the acquisition generally follows that 15-year period for the buyer, even if the agreement lasts for fewer years.
Payments for the seller's continuing work are generally ordinary income to the seller. To treat them as service payments separate from the purchase price, the fees must be reasonable for the work actually performed. An amount labeled as a consulting fee may instead be part of the purchase price. Don't leave these distinctions to a template at closing.
Equipment deductions can help with cash flow
The 2025 federal tax law restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. Many types of dental equipment may qualify for a first-year deduction. Used equipment can qualify too, but prior use by the buyer, purchases from related parties, and other acquisition rules can affect eligibility.
Section 179 expensing is another possible route. For tax years beginning in 2026, the federal limit is $2,560,000, with the limit reduced once qualifying purchases exceed $4,090,000.
The fastest deduction isn't always the best choice. Section 179 has business-income limits, while bonus depreciation can create or increase a loss. Other tax limits may delay the benefit of that loss. Taking a large deduction now also leaves fewer deductions later, so compare the results over several years.
Earnouts need clear terms
An earnout makes part of the price depend on future results, such as collections or patient retention. It can help the parties agree on value, but the payment terms need careful drafting.
Later payments may be treated as purchase price, interest, compensation, or a combination. That changes when income is reported and whether it receives capital gain treatment. Installment reporting may be available for eligible gain, but it doesn't apply to every payment. Depreciation recapture, the gain taxed as ordinary income because of earlier depreciation deductions, generally must be reported in the year of sale even if the buyer pays later.
Prepare before the agreement is signed
Sellers can prepare by keeping financial records current, removing personal expenses from the practice's books, and reviewing the ownership structure. A C corporation asset sale can create tax at both the corporate and shareholder levels, and planning around that may take years.
Buyers should review financing, the entity making the purchase, and the allocation of the price together. For Ohio practices, state income tax and sales and use tax also deserve attention. Receipts from selling capital assets and qualifying business property, such as practice equipment and goodwill, are generally excluded from Ohio's commercial activity tax. Other receipts need separate review.
Contact Schultz CPA, LLC before committing to a purchase or sale. We can compare the tax results with you and your attorney while there's still time to adjust the terms.
This article provides general information. Tax treatment depends on the assets, entities, and agreement involved. Get tax and legal advice before signing.