Tax Planning When Selling a Dental Practice

Selling a dental practice is likely the largest financial transaction of your career. For a practice selling for $1M–$3M+, the tax implications can mean the difference of $200,000 to $500,000+ in after-tax proceeds. The key is planning well in advance — not scrambling at closing.

Asset Sale vs. Stock Sale

Most dental practice sales are structured as asset sales, where the buyer purchases the practice's assets (equipment, patient records, goodwill) rather than the entity itself. The allocation of the purchase price across these asset categories determines your tax treatment:

Equipment: Subject to depreciation recapture (ordinary income rates up to 37%)
Personal goodwill: Taxed at long-term capital gains rates (typically 20% + 3.8% Net Investment Income Tax (NIIT))
Covenant not to compete: Ordinary income to the seller
Real estate: Capital gains if held long-term, plus potential depreciation recapture

Key strategy: Maximizing the allocation to personal goodwill is critical — it's taxed at the lowest rate. Personal goodwill (your name, reputation, and patient relationships) can often represent 60–80% of the practice value and is taxed at long-term capital gains rates rather than ordinary income rates.

Pre-Sale Planning: 2–5 Years Out

The best tax outcomes require planning years before the sale:

Entity restructuring: Ensure your entity structure is optimized for a sale. C-Corp owners face double taxation; S-Corp or LLC structures generally produce better outcomes for sellers
Defined benefit plan funding: Use a defined benefit plan to shelter $150K–$300K+ per year in the high-income years before the sale
Equipment purchases: Accelerate equipment depreciation in the years before the sale to maximize deductions while income is high
Real estate separation: If you own the practice real estate, separate it into a holding entity well before the sale

Installment Sale Strategy

If the buyer is paying in installments (common with associate buy-ins or seller-financed transitions), you can use an installment sale to spread the capital gains over multiple tax years. This keeps you in a lower bracket each year and defers the total tax burden.

Opportunity Zone Investment

If you have significant capital gains from the sale, investing in a Qualified Opportunity Zone fund can defer and potentially reduce those gains. This strategy works best with gains of $500,000+ and a 10-year investment horizon.

DSO Sales and Roll-Ups

If you're selling to a Dental Service Organization (DSO), the deal structure may include an equity rollover — where you receive cash plus equity in the DSO. The tax treatment of the equity rollover depends on how the deal is structured. Getting a tax strategist involved in the LOI stage can save significant taxes.

Don't Wait Until Closing

The biggest mistake dentists make is engaging tax planning after the deal terms are set. By that point, the purchase price allocation is often already negotiated, and restructuring options are limited. At Crane Financial, we start tax strategy planning 2–5 years before a planned exit to maximize your after-tax proceeds.