Proposed Tax Changes and the Sale of your Practice

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It’s election season and all of the candidates have announced their plans for tax and legislative changes that they would work to pass if they were to get elected. No one knows who our next president will be, but we do know what might happen to our taxes depending on who wins in 2020. The Wall Street Journal published an article on January 27, 2020 that outlines each candidates’ proposed tax changes. Regardless of which candidate you support, no one likes to pay taxes, and no one likes it when their taxes go up. But, if you are considering a sale of your practice in the next few years, pay attention to these proposed tax changes.

In a typical practice sale, 80% of the sale price is allocated to goodwill. Goodwill is taxed as long-term capital gains, which for most is currently 20%. The remaining 20% of the sale price, gets allocated to furniture, fixtures, supplies, equipment, and other tangible assets. This portion of the sale price is taxed as ordinary income. Ordinary income taxes are progressive, and change based on your income for that tax year. For most dentists, in the year they sell their practice, they will fall into the top tax bracket, which is currently 37%.

In the table above, compiled by the Wall Street Journal, you will see that none of the candidates plan on keeping the capital gains rate at the current 20%. Biden, Buttigieg, and Warren all would like to raise this tax to 39.6%, which would match what they’d like to make the top income tax rate. Sanders also would like to see the capital gains rate match the top income tax rate but wants to raise it all the way up to 52%.

If you are planning to use the proceeds of the sale of your practice to fund your retirement, this change in tax rate could greatly affect your retirement projections and potentially alter how much longer you might have to work. The proposed tax changes are huge, not just a few percentage points. These changes could double the amount of tax you will have to pay and you need to be prepared for that. If you are on the fence about selling, you might want to consider doing something sooner rather than later. You might not be able to afford to take the gamble of waiting.

For a free practice appraisal, or to talk to someone about your options, click here.