Understanding the Allocation of Assets and Minimizing the Tax Liability in a Practice Sale

By Greg Jones
FDC 2026 Speaker

If you would like to minimize tax costs on your future sale, you will need to understand which components of the sale trigger which types of tax. For example, under current tax laws, the highest regular tax rate (37%) will be higher than the capital gains tax rate (20%). So, the idea here is to allocate as much of the sales price as allowed by law to Goodwill (capital gains tax rates), rather than to fixtures, furniture or equipment (ordinary income tax rates) for a seller.

Below is a list of such assets and their IRS categories.

Ordinary Income                                        Capital Gains
Equipment                                                      Goodwill
Furniture and Fixtures                                    
Computers                                                    
Leasehold Improvements                                                      
Consulting Agreement
Dental Supplies
Covenant not to Compete

Please keep in mind that the Internal Revenue Service (IRS) has a “pecking” order on how to allocate the sales price of your dental practice. The order of allocations starts with the “Hard Assets” (ordinary income) and concludes with the final allocation of the “Soft Assets” (capital gain).

Using the above list as a guide and your knowledge on how to allocate the sales price to your benefit as a Seller (to minimize the income taxes as a result of the sale), a majority of the sales price would need to be allocated to goodwill as opposed to the items listed. The table below shows the potential tax costs associated with the sale of a dental practice at $1,000,000.

Table

Sale Price:	$1,000,000
Type of Asset	Amount	Tax Rate	Tax Type	Tax
Fixtures, Furniture, & Equipment	$195,000.00	37%**	Ordinary Income	$72,150.00
Covenant Not to Compete	$5,000.00	37%**	Ordinary Income	$1,850.00
Goodwill	$800,000.00	20%	Capital Gains	$160,000.00
TOTAL	$1,000,000.00			$234,000.00
*Does not include state taxes, if applicable	*Does not include state taxes, if applicable
**Assumes the Taxpayer is in the highest ordinary tax rate	**Assumes the Taxpayer is in the highest ordinary tax rate

As you can readily see from the above, the blended tax costs are approximately 23% of the sale price of $1,000,000 ($234,000 / $1,000,000).  The more of the sale price that is allocated to hard assets, the higher the tax costs to the seller.

The parties need to negotiate how much of the agreed-upon sale price is allocated to each asset type. As a rule of thumb, if ten deals were brokered, I would estimate that eight of the 10 would have 80% of the allocation to Goodwill (capital gains). This is mostly because many of the sellers have offices with dated décor and equipment. If the practice has newer décor and a greater number of high-value pieces of equipment (e.g., CBCT, CEREC), it may have a lower allocation to goodwill and a higher allocation to fixtures, furniture and equipment.

Now, let’s flip the script. From a buyer’s perspective, they want a greater allocation to fixtures, furniture and equipment rather than goodwill, which the seller prefers. So, you may ask yourself, why does the buyer want more allocated fixtures, furniture and equipment? The depreciation / amortization chart below will help you understand why this is the case.

Ordinary Income Property                          Capital Gains Property
Equipment (five years)                                          Goodwill (15 years)
Furniture & Fixtures (seven years)                      
Computers (five years)                                      
Leasehold Improvements (15 years)                                                
Consulting Agreement (immediate)
Dental Supplies (immediate)
Covenant not to Compete (15 years)

For example, the buyer wants a majority of the sales price allocated to the equipment, because it can be written off (expensed/depreciated) over five years, whereas goodwill is amortized over 15 years.

Internal Revenue Service (IRS) Requirements

When you sell a dental practice, the IRS requires both the buyer and seller to disclose such within their income tax returns in the year of sale. The information disclosed is who the buyer is, who the seller is, the sales price and how the sales price was allocated. The IRS Form that requires such information is IRS Form #8594, Asset Acquisition Statement under IRS Code Section 1060”. If you would like to review such form, please go to: www.irs.gov/forms-pubs/about-form-8594.

Disclaimer: Doctor’s Choice Practice Transitions is not a certified public accountant (CPA) firm, nor do we provide accounting, tax or financial advisory services. Any information shared by our team is for general informational purposes only and should not be considered tax or financial advice. We strongly recommend consulting with a qualified CPA or tax professional regarding any financial, tax or accounting matters related to your practice transition.