At Mahan Law, we regularly advise veterinary professionals around the country on all aspects of practice transitions. There are several tax-saving strategies involved in the sale of a veterinary practice, but it takes an experienced veterinary attorney to help you plan for the potential tax implications. When you become our client, you will have confidence in knowing that your investment will be protected. Contact our office today to get started.
Planning Your Tax-Saving Strategies
The tax consequences of selling a veterinary practice depend on factors such as how the business is organized (e.g. C-Corp., S-Corp, LLC) and how the deal is structured. Depending on the circumstances, you may be subjected to both capital gains taxes and income taxes as a result of the sale. Let's take a look at some potential tax-saving strategies in a veterinary practice transition.
Stock Sale v. Asset Sale
While a stock sale is more advantageous for the seller, most veterinary practice sales are structured as asset sales due to the potential tax, legal, and liability implications of a stock sale for the buyer. In an asset sale, the owner is selling all of the tangible and intangible assets of the practice. Because those assets fall under different categories that are taxed at different rates, it is crucial to properly allocate the sales price when selling your veterinary practice.
Price Allocation
According to IRS rules, the sales price of a veterinary practice must be allocated to the specific assets being sold based on their fair market value. Generally, tangible assets (e.g. equipment, clinical and office supplies, inventory, restrictive covenants) are taxed as ordinary income "above basis" -- the difference between the sales price and the book value of the asset. On the other hand, intangible assets (e.g. goodwill, brand recognition, intellectual property) are taxed as capital gains.
Given that "fair market value" is rather subjective, it is possible to negotiate the overall allocation of the purchase price. As a veterinary practice seller, you can reduce taxes by negotiating with the buyer for a lower allocation to tangible assets and a higher allocation to intangible assets. Of course, it will benefit the buyer to have the opposite allocation, so any allocation must be fair to both parties.
Holding a Promissory Note
Sellers often consider self-financing part of the sales price by holding a promissory note. Doing so may not result in any appreciable tax savings, but it may help to defer taxes. While the portion of the sales price that will be taxed as ordinary income will be due in the year of the sale, you will still owe ordinary income tax on the recapture.
Because the remainder of the sales price (e.g. the price of the intangible assets) will be taxed as capital gains, and since the capital gain tax rate is fixed, the same amount of taxes will be owed regardless of whether you receive that portion of the price now or whether it is paid to you over time.
In the end, you need to determine if you are willing to pay taxes upfront by receiving a lump sum payment or prefer to receive periodic payments and spread your taxes out over several years.
Timing the Sale
The tax associated with the sale of tangible assets of your practice will be largely determined by your income tax bracket in the year of the sale. If you are planning to retire, it may be in your best interests to time the sale until after the next tax year because your ordinary income will likely be lower.
Real Estate
If real estate is included in the sale of your veterinary practice, the property will also be subject to capital gains taxes on the sale. Given that tax laws are subject to change, you must ultimately decide whether to retain the property as a source of income going forward or sell it now and pay the capital gains tax.
Why Choose Mahan Law?
If selling your veterinary practice is on the table, it is crucial to have the informed representation we provide. As the owner of a veterinary clinic, lead attorney Anthon Mahan understands the business of running a practice. By collaborating with a respected network of tax professionals, we can help plan for the tax implications of selling your veterinary practice. Above all, we will work to help you minimize the tax consequences of the sale, maximize the value of your practice, and secure your investment.
Contact Our Experienced Veterinary Attorneys to Learn More About Tax-Saving Strategies
Whether you are selling or buying a veterinary practice, there are significant tax implications to consider. By working with an attorney knowledgeable in the IRS rules applicable to practice sales, you can take advantage of a number of tax-saving strategies. Contact our office today to set up a consultation.