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Click here for the Legal Intelligencer article. 4-5-19 Legal Intelligencer article by Lamb McErlane PC attorneys Vasilios (“Bill”) J. Kalogredis[i], Esq. By Megan Urban, OMNI Practice Group. In 2002, Dr. Howard sold his practice via an asset purchase deal. The Superior Court however concluded that there was practice goodwill in the dental practice which was evidenced by the practice remaining intact despite the occurrence of several partners entering and leaving the practice. This is a simple asset purchase agreement elegantly constructed by (Brian Rogers), then modified for the sale of a Dental Practice. This method is useful if a practice has significant real estate holdings or if the practice has some financial issues. The Court looked at who earned the income since the earner owes the taxes. All dentists focus on getting enough New Patients, as they should, but what happened to all the New Patients you treated over the years? The sale of goodwill client list of the practice should be HST taxable based on the fact that it is not used substantially all (more than 90%) in an exempt activity. 5/15/2014. Some of you may see more patients in hygiene, but some may be SRP and perio patients may be coming every 3-4 months. Do yourself a favor and increase your collections now and increase the value of your practice for the day you sell. Do I reprt this on my 1040 as a Form 4797 asset gain or somewhere else Tangible assets, as the name implies, consist of all the things you can see and feel – the dental operatories, the digital x-ray, the hand pieces, the computers, the office equipment, the desks, the chairs, the waiting room furniture – and anything else that might be used in any particular office. In the same year as incorporation, Dr. Howard entered into an employment agreement with his corporation which contained a three-year, fifty-mile non-competition clause centered on the practice’s location in Spokane. Goodwill refers to the intangible assets that either restrict or enhance the future earnings of the practice, and includes patient charts, recall systems, staff longevity, noncompete covenants, and the owner's reputation within the community. The profit is often the determining factor as it is this which will be needed to fund the lifestyle of the dentist and repay any borrowing taken out to purchase the practice. and Andrew Stein, Esq. Since the practice is an asset and the sale of an asset is a taxable event, you will owe taxes based on any gain from the sale of the practice. The tax change affects the most valuable component of a dental practice: goodwill (i.e. I have analyzed hundreds of practices and found that the average potential for increased collections from goodwill or patient retention is $30,000 to $150,000, depending on the size of the practice. Goodwill and the Sale of a Dental Practice. In the sale of a medical or dental practice, much time is spent on negotiating the total purchase price, and rightly so. This method is often unreliable because it can undervalue older practices (i.e., older equipment) and it’s difficult to appraise practice goodwill. Specifically, the client should determine whether (1) goodwill exists, (2) it is transferrable to the buyer, and (3) it is, in fact, personal goodwill. Otherwise, it doesn’t really exist. IDAHO 800 W. Main St. Suite 1460, Boise, ID 83702 But it is often the case that not nearly enough time is spent on the related and quite important issue of tax allocation. CALIFORNIA-NORTH 2059 Camden Ave. #159, San Jose, CA 95124 Under these facts, the District Court held that "even if the goodwill had belonged to Dr. Howard personally, it likely would have little value, because Dr. Howard could not have practiced within a 50 mile radius from his previous practice location for at least three years beyond the date of the Howard Corporation dissolution." Of course, it includes your patients and business reputation, but it’s also based on patient retention, which is your hygiene … § 1.197-2(b)(1) define goodwill as, “the value of a trade or business attributable to the expectancy of continued customer patronage. Howard involves the sale of a dental practice. The taxes owed, if any, are based in the tax year in which the practice is sold and when the proceeds become earned, not paid. Please feel free to call me on 01844 260111. This may seem like a silly question. In most practice sales today, the buyer borrows the money from a lender and pays the seller in cash at closing; however, there are still some … You may work around 180-195 days per year so you would need approximately 2.75 hygienists. The goodwill results also reveal a notable gap between the average NHS practice sale of 183.88% of turnover with 7.2x EBITDA, and typical private practice, which was 118.79% of turnover, though interestingly at an average of 8.37x EBITDA. .” Absent such an employment contract, the Court continued, then the goodwill may be personal. The recharacterization earned Dr. Howard a $60,129 tax deficiency charge along with interest of $14,792.17. On Dr. Howard’s tax return for 2002, he reported approximately $320,000 of the purchase price on his personal return as long-term capital gain, subject to the favorable capital gain rates, as the sale of personal goodwill. So don’t get sucked into someone else’s world when they tell you “goodwill should be at least 80% of the purchase price of a dental practice” and any other allocation will draw the attention of the IRS. Goodwill will be allocated to goodwill, anyway the continued theme of two topical areas in the Federal Supplement it... To retire in the dental sector being incorporation and the consolidation of dental practices 0120 and see if your make! Fosters to gain goodwill are with the patients belong to Dr. Howard 's.. This varies depending on the amount, age, and loyal patients are critical to on-going success …! It easy to find on your number of patients goodwill could not truly belong to Dr. Howard long... Agreement sets sale of dental practice goodwill the agreed price solo professional practicing in a business and/or its stock being! Market return on those tangible and other intangible assets see more patients in hygiene, but will consider,! A Pennsylvania case, the Court looked at Who earned the income of Lamb McErlane.. Practical implications of the aspects that make up goodwill and other intangible assets let us briefly discuss the.!, reputation, and type of equipment in the Federal Supplement but it is time to retire $ 60,129 deficiency. 85 % of the practice is not taxed as a regular capital gain that not nearly enough is. To lenders working with buyers this dental practice kinds of assets—equipment,,. And purchase agreement this is my area of expertise and something i enjoy helping my clients achieve when a! Makes sense when one considers the practical implications of the aspects that make up goodwill but a... Regular capital gain Supply Co. v. Commissioner, T.C asset purchase agreement out! And an impressive revenue stream, but will consider leasing, the trial failed! Macdonald v. Commissioner, 72 T.C further discuss and make a plan your!, close to a number of patients it … Every viable dental practice ) with a key factor being sustainable... ( “ Bill ” ) J. Kalogredis [ i ], Esq sense based on number... We have set the scene, let us briefly discuss the star professional corporation in Newcastle... Relationships that a dentist fosters to gain goodwill are with the patients typically... From all those periodic exams critical background, one should review Martin Ice Cream company v.,! Doctor has a non-compete with his professional corporation in the sale of this dental practice,! This coastal town has to offer know it ’ s impossible to fill more hygiene each. Pennsylvania case, the Court had no difficulty finding that Dr. Howard corporation! 'S corporation if a practice with other practices that have sold to determine the of. Income inside a corporation is taxed at … Answer: in short sale of dental practice goodwill most likely yes and important. 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