Have you prepared yourself to sell your Dental Practice?
A couple of blog posts ago I discussed the benefits of incorporating a dentistry professional corporation (the “DPC”). From a tax perspective, there may be no better advantage of incorporating than the Capital Gains Exemption (the “Exemption”) for Qualifying Small Business Shares of a DPC. When you start thinking of selling your practice you should
first speak to your accountant and lawyer to ensure that you do all things to ensure the sale is completed in a smooth and tax efficient manner.
Can Dentists take advantage of the Capital Gains Exemption for Qualifying Small Business Shares?
As of 2014, up to $800,000 of your capital gains realized on the sale of your shares of your DPC can be exempted (per individual over the course of their life). The Exemption can be used by any shareholder (including your spouse and children (if properly set up) of your DPC. When selling the shares of your DPC a capital gain occurs when you sell shares and the value of those shares has increased over the cost to you of the shares. As it stands now 50% of capital gains are taxable and 50% are not subject to tax. Therefore, if you have a capital gain of $800,000.00 and do not qualify for the Exemption $400,000.00 of your gain will be tax free and the remaining 50% will be taxed at your marginal tax rate of approximately 46% (assuming the highest marginal tax rate) = $184,000.00 tax. If your spouse or other family member is also a shareholder they may also qualify. If you qualify for the Exemption your saving, as noted, will therefore be the $230,000.00 tax paid. When dealing with practices being sold this will amount to significant savings.
Capital Gains Exemption on a Sale of Shares of Dentistry Professional Corporation
You should be aware of the following matters to ensure that your DPC qualifies for the Exemption:
• At the time of the sale, a minimum of 90% of the DPC’s assets must be used in an active dentistry business. For example if you have passive assets such as cash, stocks, bonds or real estate not used in the active business at closing your DPC will not qualify. The corporation can be cleansed, prior to the closing, of your passive assets by a reorganization to ensure that your DPC does qualify for the Exemption. This should be done prior to your entering into the agreement to sell;
• In the preceding 24 months prior to the sale more than 50% of the DPC’s assets must have been used in the dentistry practice. Again, if you are contemplating a sale of your practice ensure that you have your lawyer and accountant review the DPC to ensure that it qualifies;
• If you have not incorporated a DPC when contemplating your sale you can still enjoy the capital gains Exemption by incorporating and rolling your practice into your newly incorporated DPC on a tax free rollover prior to the closing.
I always advise my dentist clients that they may decide spontaneously to sell, or be forced to sell as a result of a disability or death and therefore the DPC should always be in a position to qualify. The tax savings of a sale share of a DPC that qualifies for the exemption as compared to one that does not or an asset sale, are substantial.
If you do not meet all of the requirements noted above you should consult with your accountant and lawyer to discuss how to qualify your DPC.
Kutner Law LLP, has been assisting dentists for over 35 years and would be happy to set up a free consultation to discuss your sale or simply whether your DPC presently qualifies and, if not, to assist you to reorganize your DPC to ensure it does qualify for you to enjoy the Capital Gains Exemption.
Contact us for a FREE Consultation