Selling a dental practice is a big milestone—whether you’re retiring, moving on to new opportunities, or just ready for a change. But before you start celebrating, there’s one big thing to keep in mind: taxes can take a much bigger bite out of your profits than you expect.
If you don’t plan ahead, you could end up giving the IRS way more than necessary. So, let’s break down what you need to know about the taxes involved in selling a dental practice—and how you can keep more of your hard-earned money.
1. Capital Gains Tax: The IRS Wants a Cut of Your Sale
You’ve spent years building your practice, so when you finally sell, it should feel like a win. But then… capital gains tax enters the picture.
Here’s how it works: The IRS taxes the profit from your sale as a capital gain, which is usually lower than ordinary income tax—but still something you need to factor in.
- If you owned your practice for over a year, the tax rate is 0%, 15%, or 20%, depending on your total income.
- If you sell for $800,000 and your adjusted basis (basically, what you originally paid and put into the business- the depreciation deduction you already took) is $500,000, you’re looking at $300,000 in taxable gain.
And don’t forget—if you live in a state like California or New York, you might also get hit with state capital gains tax on top of that.
Ways to Reduce the Tax Hit
- Start another practice from scratch the same year you sell your existing practice: If you’re reinvesting in another practice you can use the write-offs of the new practice to offset some of the gain for the sale of the equipment and assets of the existing practice. But this must take place in the same year.
- Installment Sale: Instead of getting paid all at once, spreading the sale out over a few years can keep you in a lower tax bracket each year.
- Donor Advised Funds: If you’re charitably inclined, donating part of your proceeds can lower your taxable income and the donated amount can grow tax-free until you disburse it to the charity of your choice.
Bottom line:
You don’t have to accept a massive tax bill—there are ways to soften the blow. However, we recommend working with an experienced dental CPA to help you navigate these more advanced strategies.
2. Not Everything Gets the Capital Gains Rate—Some is Taxed as Ordinary Income
One of the biggest tax surprises for dentists selling their practice is that not everything qualifies for the lower capital gains rate. Some of it gets hit as ordinary income tax, which can be as high as 37%.
This happens because when you sell, the IRS makes you break your practice down into different asset categories:
- Goodwill and patient records? Those typically qualify for capital gains.
- Equipment, furniture, and supplies? Those get taxed at ordinary income rates—ouch.
- Accounts receivable (if you’re cash-based)? Same story—it’s taxed at your regular income rate.
Let’s say $150,000 of your sale price is for fully depreciated dental equipment. That entire amount is taxed as ordinary income, not capital gains.
How to Keep More of Your Sales in Capital Gains
- Negotiate with the Buyer: More of the price should be allocated to goodwill rather than tangible assets.
- Consider a Stock Sale: If your practice is structured as an S Corp, selling stock instead of assets can avoid this issue altogether.
- Use an Installment Sale: Again, spreading out payments can reduce the overall tax impact.
Moral of the story?
How the deal is structured makes a huge difference in how much tax you pay.
3. Depreciation Recapture: The IRS Wants Back What It Gave You
Remember those tax breaks you got for depreciating your dental equipment, office furniture, or leasehold improvements? Well, the IRS remembers too. And now that you’re selling, they want some of it back.
This is called depreciation recapture, and it means that any depreciation deductions you’ve taken over the years now get taxed as ordinary income (up to 25%) when you sell.
So, if you deducted $60,000 in equipment depreciation over the years, that’s $60,000 in taxable income when you sell.
How to Lessen the Impact
- Shift More of the Sale to Goodwill: Again, goodwill gets capital gains treatment, so adjusting the allocation can save money.
- Start a new practice in the same year: If you’re reinvesting, you can defer taxes.
- Go the Installment Route: Spreading out payments can make recapture less painful.
Depreciation was great while it lasted—but now, it’s coming back around. The goal is to structure the sale wisely so you don’t get stuck with a bigger tax bill than necessary.
4. Accounts Receivable and Work in Progress: Getting Taxed on Money You Haven’t Even Received
Here’s a frustrating tax rule for cash-basis dentists: When you sell your practice, any unpaid patient bills (accounts receivable) and unfinished treatments (work in progress) get taxed as ordinary income—even if you never collect the money.
Let’s say you have $200,000 in accounts receivable when you close the sale. Even though the buyer is the one actually collecting that money, you still owe tax on it.
Ways to Avoid This Tax Hit
- Sell Your Receivables Separately: Some buyers will purchase AR at a discount, meaning you don’t have to pay taxes on money you’ll never see.
- Collect AR Before Selling: This can be a hassle, but it ensures you get the full value instead of selling it at a discount.
- Negotiate a Better Deal: Some buyers may be open to structuring the purchase in a way that reduces your AR tax burden.
This one catches a lot of dentists off guard, so make sure you factor it into your sale strategy.
5. State and Local Taxes: Don’t Forget About Them
Federal taxes are bad enough, but depending on where you live, state taxes could be just as painful.
- Texas & Florida: No state income tax, meaning you only deal with the federal side.
- California & New York: Capital gains get taxed as ordinary income at the state level, adding another 13%+ on top of your IRS bill.
- Some Cities Add Extra Business Taxes: Check if your location tacks on additional business sale taxes.
If you’re thinking about moving to a tax-free state before selling, just be aware that states like California have rules preventing you from dodging taxes by moving at the last minute. But if relocation is on the table, planning ahead could save you tens of thousands in taxes.
So, How Much Will You Actually Owe?
It all depends on how your sale is structured. If you don’t plan ahead, taxes could eat up 30% or more of your sale price. But with the right strategies—installment sales, asset allocation, reinvestment planning—you can cut that bill significantly.
At Virjee Consulting, we specialize in helping dentists sell their practices without overpaying in taxes. We know the ins and outs of practice sales and can help you structure a deal that keeps more money in your pocket and less in the IRS’s hands.
Thinking About Selling? Let’s Talk.
Before you sign anything, let’s go over your options and see how much you can actually save.
📅 Schedule a call today, and let’s make sure you don’t hand over more than you have to.
Until next time!
