Buying a dental practice is the largest financial decision most dentists will ever make — and the tax implications of how you structure the deal can easily swing your outcome by $50,000–$200,000 over the first five years. Yet most buyers focus almost entirely on the purchase price and barely think about taxes until after closing. By then, the most valuable planning opportunities are already locked in — or locked out. Here's what you need to know before you sign.
Purchase Price Allocation: Where the Money Goes Matters
When you buy a dental practice, you're not just buying "a business" — you're buying a bundle of assets, and how the purchase price is allocated among those assets has massive tax consequences. The IRS requires both buyer and seller to agree on the allocation (Form 8594), and your interests are directly opposed.
Here's why it matters:
| Asset Category | Depreciation Period | Buyer's Preference |
|---|---|---|
| Dental equipment (chairs, handpieces, CBCT) | 5–7 years (or Section 179) | Allocate more here |
| Furniture and fixtures | 7 years | Allocate more here |
| Covenant not to compete | 15 years | Moderate — still faster than goodwill |
| Leasehold improvements | 15 years (QIP) | Moderate |
| Goodwill | 15 years | Allocate less here |
| Patient records / charts | 15 years | Allocate less here |
As a buyer, you want to maximize allocations to shorter-lived assets — especially equipment eligible for Section 179 immediate expensing. If you allocate $200,000 of a $900,000 purchase price to equipment instead of $80,000, you've just created an additional $120,000 in accelerated deductions. At a 37% tax rate, that's $44,400 in tax savings you'd otherwise wait years to realize.
Critical point: Purchase price allocation is negotiated before closing and cannot be easily changed afterward. If you don't have a tax strategist involved during the deal, you're likely leaving the seller's CPA or broker to drive the allocation — and their client's interests are the opposite of yours.
Entity Structure: Get It Right From Day One
The entity you use to acquire the practice will affect your tax situation for years. Most dental practice buyers default to whatever their attorney sets up — usually a single-member LLC — without analyzing the tax implications.
For most practice buyers with expected net income above $80,000 (which is nearly all of them), an S-Corp election should be evaluated immediately. The S-Corp allows you to split income between salary and distributions, saving $10,000–$30,000+ per year in self-employment tax. But the election has timing requirements — you generally need to file within 75 days of the start of the tax year — so this decision needs to happen before or immediately after closing.
If you're buying the building along with the practice, the real estate should typically be held in a separate LLC that leases the space to your practice entity. This creates liability separation and opens the door for additional tax strategies like cost segregation and potentially qualifying for real estate professional status (REPS) deductions.
Section 179 on Acquired Equipment
Here's a strategy many buyers miss entirely: the equipment you acquire as part of the practice purchase may qualify for Section 179 expensing in the year of acquisition. If you allocate $150,000–$300,000 of the purchase price to equipment (chairs, handpieces, CBCT, digital scanners, sterilizers), you can potentially deduct the entire amount in year one.
The key is having the equipment properly identified and valued in the purchase agreement and Form 8594. This requires coordination between your tax strategist, the appraiser, and your attorney — ideally starting well before closing.
Cost Segregation on the Building
If you're buying the practice building (or making significant leasehold improvements), a cost segregation study should be on your list immediately after closing. This engineering-based analysis reclassifies portions of the building from 39-year depreciation to 5, 7, or 15-year property — accelerating hundreds of thousands of dollars in deductions into the first few years of ownership.
On a $1.5M dental office building, cost segregation typically reclassifies $300,000–$600,000 into shorter-lived categories. The resulting first-year tax savings can be $50,000–$100,000+.
Financing: What's Deductible and What Isn't
Most practice acquisitions involve significant borrowing — often $500K–$1.5M in SBA loans or conventional financing. The interest on acquisition debt is generally deductible, but there are nuances:
Interest expense on practice acquisition loans is deductible as a business expense, subject to the Section 163(j) limitation (which most dental practices fall below).
Loan origination fees are amortized over the life of the loan, not deducted in year one.
Personal guarantee — if you personally guarantee the loan (as most buyers do), this affects your basis in the entity and can impact your ability to take losses.
Transition Period Tax Planning
The first 12 months after acquisition are a unique planning window. You're establishing baselines, setting up systems, and making decisions that will compound for years. During this period:
Set up retirement plans immediately. A defined benefit plan or solo 401(k) should be established in year one. The defined benefit plan alone can shelter $100,000–$300,000+ in annual income from taxes.
Establish your accounting method. Cash vs. accrual matters for dental practices, and the choice affects when income and expenses are recognized.
Document everything. The IRS pays attention to asset purchases and entity formations. Clean documentation of your purchase price allocation, entity elections, and depreciation schedules will protect you for years.
About to buy a dental practice? The biggest tax savings happen before closing — not after. We'll review your deal structure and show you exactly how to optimize the purchase price allocation, entity structure, and first-year deductions.
Book a Free Acquisition Review →The Bottom Line
Buying a dental practice without tax planning is like performing a crown prep without a treatment plan — you might get through it, but you'll pay for the mistakes later. The decisions you make around purchase price allocation, entity structure, and depreciation strategy will affect your tax bill for the next 5–15 years. Get a tax strategist involved before the LOI, not after the closing. The ROI on pre-acquisition planning is the highest you'll ever see.