Selling Your Dental Practice: Keep More of the Goodwill

On a $2,000,000 practice sale with $1,700,000 of goodwill, spreading the goodwill over 10 years cuts the total tax from $665,079 to $510,683 in California, and from $435,975 to $326,268 in a state with no income tax. The equipment and supplies are taxed in year one either way; the difference comes entirely from keeping each year's goodwill in lower brackets.

Go deeper: selling a dental practice and how each asset is taxed on Big Sale Tax.

A $2M dental practice sale: all at once vs. spread over 10 years

Price split: $1,700,000 goodwill (zero basis), $250,000 fully depreciated equipment and $50,000 supplies, both ordinary income in year one.

How these were run: married filing jointly, $150,000 of other taxable income every year, you materially participate in the business (so the 3.8% net investment income tax does not reach the business gain), 2026 federal and state tax tables applied to every year, and federal alternative minimum tax included. Interest the buyer or insurer pays on the unpaid balance is extra ordinary income and is not in these figures; it is also extra money you would not have earned on a check you already sent to the IRS. Same engine as our calculator, so you can rerun it with your own numbers.

What is different about a dental practice sale

• Patient records and goodwill are capital assets for the selling dentist. This is the part of the price that can be spread.
• Equipment (chairs, imaging, scanners, lasers) is usually fully depreciated, so its sale price is §1245 recapture: ordinary income, taxed in the year of sale (IRC §453(i)).
• Supplies are inventory, ordinary income in year one (IRC §453(b)(2)).
• Receivables of a cash-basis practice are ordinary income when collected or sold.
• Your post-sale employment agreement and non-compete pay compensation, not purchase price, so they are ordinary income. Watch how much of the deal value the buyer moves into these.
• Personal vs. practice goodwill. In Howard v. United States (9th Cir. 2011), a dentist who had signed a non-compete with his own professional corporation was held to have no personal goodwill, and about $550,000 he received for goodwill was taxed as a corporate distribution instead of capital gain. If your practice is incorporated, how goodwill is owned should be settled before the letter of intent.
• DSO deals with rollover equity. The cash portion can be structured; the equity rollover follows its own rules.

What can be spread, and what is taxed in year one anyway

A structured installment sale under IRC §453 spreads the capital gain. A few pieces of almost every business sale are ordinary income and land in the year of sale no matter how the payments are scheduled. Knowing them up front is what makes the year-one number predictable:

• Goodwill and other capital assets: spread across the payment schedule you choose. This is usually the largest part of the price.
• Depreciation recapture on equipment (§1245): taxed in the year of sale even if no cash arrives that year (IRC §453(i)).
• Inventory and supplies: excluded from installment reporting (IRC §453(b)(2)), ordinary income in year one.
• Receivables of a cash-basis business: zero basis and ordinary income (IRC §1221(a)(4)).
• Non-compete, consulting and employment payments: compensation for your future services or your promise, so ordinary income when paid.
• Interest on the deferred payments: ordinary income each year it is paid.

The price allocation in the purchase agreement (IRC §1060, Form 8594) decides how much of the price sits in each bucket, so it is worth negotiating before signing, not after.

The rules that keep the deferral intact

• The $5 million line (§453A). If more than $5,000,000 of installment notes from sales over $150,000 are outstanding at year end, an annual interest charge applies to the deferred tax on the excess. Many structures are sized to stay under it.
• No borrowing against the note (§453A(d)). Pledging the installment obligation as collateral is treated as receiving payment.
• Related buyers (§453(e)). If you sell to a related person and they resell within two years, the deferral can accelerate.
• Electing out is a one-way door (§453(d)). The election is due with the return and can be revoked only with IRS consent.
• Earn-outs. A price that depends on future results is a contingent payment sale: with a stated maximum price, basis is recovered as if the maximum is paid; with only a fixed period, evenly over that period; with neither, over 15 years (Treas. Reg. §15a.453-1(c)).

How the structured version works

The buyer pays the full price at closing. The part you choose to defer goes to an assignment company, which funds your payment schedule with a fixed annuity from a highly rated life insurer. You pick the schedule: level payments, a delayed start, a lump in a later year, or a mix. The buyer gets clean title on day one; you get a contract for future payments instead of one large taxable check. Your CPA reports each year's gain on Form 6252.

The trade-off, stated once: money you defer is not available to spend or invest elsewhere until each payment arrives, and the schedule is fixed once it is funded. Most sellers defer part of the price and keep the rest as cash at closing.

When it fits

• Goodwill is the bulk of the price, as it is in most practices.
• You are selling to a DSO, a group practice or an associate with lender financing, and the buyer pays cash at closing.
• You will keep working for a few years after the sale and do not need all of the goodwill money at once.

When it does not

• The price is mostly equipment value (a small or newly built-out practice).
• You need all of the after-tax proceeds in year one.

Frequently asked

Q: Can I structure the cash portion of a DSO deal?
A: Yes. The cash you receive for goodwill can be structured. Rollover equity in the DSO has its own tax treatment and is modeled separately.

Q: Is the payment for my employment agreement after the sale capital gain?
A: No. Pay for working after the sale, and payments for a non-compete, are ordinary income. Only the price for the practice assets, mainly goodwill, is capital gain that can be spread.

Q: Can QSBS make my practice sale tax-free?
A: Generally no. Health services are an excluded field under IRC §1202(e)(3), and the regulations name dentists, so a dental practice does not qualify.

Q: What about my receivables and supplies?
A: For a cash-basis practice, receivables have zero basis and are ordinary income. Supplies are inventory and are taxed in the year of sale. Neither can be spread.

Related

• Selling any business: the general rules
• Selling an orthodontic practice
• Capital gains tax in your state
• Run your own numbers

No retainer and no fee to you. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans's share is about 2.4%; no trail). It is built into the annuity pricing.

Educational, not tax or legal advice. 2026 figures. Your CPA or attorney should confirm the allocation and character of each payment in your deal.