Not surprisingly in today’s market, I work with a lot of ODs who are selling their practices. One of the most valuable exercises we go through is analyzing whether the sale proceeds plus their accumulated assets are enough to retire on. And there’s this one page we put together that is always a huge disappointment to review: the tax page.
They say there's two things in life that are certain: death and taxes. Just like with your income, selling your practice generates a tax bill too, and sometimes a very big one, so we're going to take a hypothetical look at what a doctor might expect to actually net from selling their practice.
Let’s say a $1mm revenue practice could sell for 65% of Gross Collected Revenues and a $2mm revenue practice sells for 75% of Gross Collected Revenues to another OD:
$1,000,000 x 65% = $650,000 Purchase Price
$2,000,000 x 75% = $1,500,000 Purchase Price
That’s a lot of money! But unfortunately, a lot of parties want a slice of those funds including Uncle Sam, your home state and the attorneys drafting the sale document. Here’s what you can expect from these pieces:
Uncle Sam will tax you on the gains of your practice. That’s the difference between the purchase price and your basis, or the dollars you’ve put into your practice. For example, your start up costs or what you purchased your practice for feed into basis. This is a good time to note that not all CPAs are great about keeping track of basis so as you file your practice return this tax season, you may want to ask yours how they’re documenting your basis. I’m going to assume basis of $100,000 in all scenarios.
The tricky thing about gains is that not all gains are treated equally. Some portion of your sale will be taxed at the expected long term capital gains rate and some at ordinary income tax rates, just like your salary. The amount of each tax type is determined in the sale structure. For today, we’re going to assume 40% is taxed at ordinary income rates and the remaining 60% is taxed at long term capital gains rates.
This varies by state but typically you’ll owe state taxes on your gains as well; usually in the same amount of your state’s income tax rate without a distinction between long term capital gains and ordinary income. I live in Georgia, so I’m going to assume this amount is 5.75%.
Brokers and Attorneys
At the very least, you can expect to incur some legal fees for drafting sale documents. This can range from $5,000 to over $50,000 for larger practice sales. In addition, if you’ve engaged a broker, they typically charge 5-10% of the sale price. Since we’re using OD to OD sale prices, let’s assume there’s no brokerage commission and attorney fees are $5,000.
Bringing it all together
Not assuming any other income, deductions, IRA contributions, tax credits, losses, etc (in other words, this is very much an illustration, not tax advice or real numbers), here’s a theoretical look at how the gross purchase price nets out: