Taxes on selling a dental practice: goodwill, equipment and you (a Walkthrough from Annex Wealth Management)

Which taxes on selling a dental practice land like a paycheck?

A dental practice sale is not one tax event. Goodwill, which is the value of the practice's reputation and patient relationships, is generally treated as capital gain. Equipment sold above its original cost may also produce capital gain, but the part previously written off can be recaptured as ordinary income. A non-compete payment and consulting fee are generally ordinary income; consulting pay may also carry payroll tax.

Three assumptions cause trouble. A note does not spread equipment recapture across its payments; recapture is recognized in the sale year, while remaining gain is generally spread as payments arrive. The buyer's allocation is your concern too: both parties file IRS Form 8594, and mismatched figures can invite questions. And a sale price is not automatically all capital gain.

Recent equipment write-offs make the split more consequential. Section 179 and bonus depreciation let owners deduct some new equipment at once, leaving little or no tax basis when they sell upgraded chairs or imaging equipment. Equipment also no longer qualifies for a like-kind exchange; that treatment applies only to real property. A sale plan that treats the full price as capital gain can miss ordinary income.

Step 1: Pull the depreciation schedule before naming a price

Ask the practice CPA for the fixed-asset and depreciation schedules, the last three business tax returns and an equipment appraisal at fair market value. The schedule shows each asset's remaining tax basis, meaning the amount not yet deducted. Mark every item at zero basis before discussing how much of the sale price belongs to equipment.

If an asset has zero basis, every dollar allocated to it is ordinary income to the seller. In 2026 the top federal rate of 37% starts above $768,700 for married couples filing jointly. The associate's lender may prefer a larger equipment number, but don't price chairs and imaging at replacement cost to please the bank; that extra value is taxed at your ordinary rate.

Step 2: Settle the allocation in the letter of intent

The associate may want more price assigned to equipment for a faster tax write-off, or to consulting pay for a current deduction. You generally want more assigned to goodwill, which is more likely to receive capital-gain treatment. Both goodwill and a non-compete are amortized over 15 years by the buyer, so a non-compete may cost the buyer little compared with its ordinary-income treatment for you. Consider a larger ordinary-income share only in exchange for a higher total price.

The rate difference can be checked on a napkin. If $100,000 moves from goodwill taxed at 20% to written-off equipment taxed at 37%, the difference is 37% minus 20%, or 17%; 17% of $100,000 is $17,000, before state tax. If the practice is a C corporation, ask the CPA whether personal goodwill can be sold directly to avoid double tax. That approach works only if you have no non-compete or employment contract with the corporation.

The table assumes a hypothetical $1,000,000 asset sale and the listed 2026 federal figures, with no state tax. Look first at the associate's-note row and the sale-closes-at-age-63 row; both affect cash or later Medicare premiums.

Step 3: Decide between cash at closing and a note from your associate

Curtis, a hypothetical 57-year-old divorced orthopedic surgeon, inherits his late father's note after the father sells a dental practice to an associate for $1,000,000. Curtis has about $1.4 million saved, spends roughly $14,000 each month, pays alimony, has one adult son and is considering part-time work at age 62. The sale allocated $800,000 to goodwill and $200,000 to fully depreciated equipment; $200,000 was paid down and $800,000 over ten years. His father's $200,000 equipment recapture was taxed in the year of sale.

Eight annual payments of $80,000 remain, or $640,000 total. The gross-profit ratio is 80%: $800,000 goodwill gain divided by the $1,000,000 sale price. So 80% of each $80,000 payment, or $64,000, is gain to Curtis. The inherited note gets no basis step-up; interest is ordinary income on top of the gain.

Assuming 25% tax on the gain for illustration, $64,000 multiplied by 25% is $16,000 tax. That leaves $64,000 each year, or about $5,300 each month, before any tax on interest. It covers a bit over a third of Curtis's $14,000 monthly spending and ends at age 64.

A note trades cash now for payments later. If the associate stops paying, the collateral is a practice whose patients may already be leaving. The seller has to keep enough closing cash to pay the recapture tax, which comes due before most note payments arrive. The interest the associate pays is ordinary income to the seller. If Curtis's son inherits the remaining note, he reports gain as payments arrive, with no basis step-up.

Annex Wealth Management counts note payments in the monthly spending plan only for the years they are due, then plans later years as if those payments have stopped. Investments bought with the proceeds can lose value, and the seller may get back less than was invested.

Step 4: Pick the closing date with two tax years in view

A December closing can stack sale gain on a full year of production income. Compare it with an early January close: the gain may then land in a year with lighter W-2 income. Don't move the date on tax logic alone; check the contract, the associate's financing and the practice's cash needs first.

Waiting can create a different bill. Medicare looks at income from two years earlier, so a sale in the year you turn 63 sets your premiums at age 65. In 2026 the top Part B tier is $689.90 a month against the standard $202.90. That is $487 more each month, or $5,844 a year per person. Consulting pay after the sale also counts toward the 2026 Social Security earnings test of $24,480 a year for anyone under full retirement age. Claim at 62 while drawing that pay and some benefits can be withheld; the sale price itself is not earnings.

Step 5: Ask the 401(k) provider what an asset sale does to the plan

Ask the recordkeeper or third-party administrator whether the practice plan will be terminated, frozen or merged, and how staff balances will leave. Be wary of “we'll mail distribution checks,” which can trigger 20% withholding and a 60-day rollover clock, or “the buyer's plan takes it over,” if you haven't signed that change. Request a direct rollover. If the practice has a cash balance plan, ask what it will cost to fund and close before the sale.

Tell your spouse what changes the day the practice changes hands

If your spouse works at the front desk, closing may end her W-2 pay and 401(k) deferrals that day, while the joint return carries the full equipment recapture for the sale year. If she outlives you while the note is still paying, she reports the remaining gain as payments arrive. An unsold practice can lose value quickly once no dentist is treating patients, so agree in advance who will handle a sale if you die or become unable to work.

The first statement Annex Wealth Management asks a selling dentist for

Annex Wealth Management would start with the depreciation schedule and year-end 401(k) statement, then place the monthly spending plan beside the draft allocation. The first question is how much of the net proceeds must fund income draws during the first five years after the sale.