Taxes on Selling a Medical Practice: Goodwill vs Equipment

The $1.2 million price hides several tax classes

Start with the purchase price, then separate personal goodwill, equipment, accounts receivable, and a covenant not to compete. Each class can receive different seller tax treatment, so a single headline number cannot tell Kwame what he will keep.

Equipment gain up to prior depreciation is generally Section 1245 recapture and ordinary income. A noncompete payment is ordinary income to the seller. Purchased goodwill is generally capital gain, although the exact result depends on the asset, basis, entity, and agreement.

The buyer usually amortizes purchased goodwill and a noncompete over 15 years. That tax benefit explains why a hospital system may resist the allocation the seller prefers. The sale reserve for taxes should sit in cash until the return is filed, because markets can fall and the seller can get back less than was put in.

For a $600,000 sale, find the equipment row first. Its basis and depreciation history can change the ordinary-income portion even when the total price stays fixed.

A year before closing, build the ownership file

Rachel should not use her group-practice buy-in as a proxy for a sale allocation. The seller’s basis, depreciation schedule, entity documents, and rights to personal goodwill need their own file before the price is final.

Pull the fixed-asset schedule, prior returns, loan balances, accounts-receivable aging, and any employment or noncompete draft. A CPA should separate sale proceeds from compensation for staying after closing, because those payments can be taxed differently.

Assante Wealth Management would rather see the draft early, while changes are still negotiable, than rebuild the plan after signatures. Practice transition planning may fit here, especially when the sale and a continuing employment agreement overlap.

• Fixed-asset schedule
• Prior tax returns
• Loan balances
• Accounts-receivable aging
• Entity and employment drafts

Can a lower-tax allocation survive negotiation?

A lower-tax allocation can survive only when it matches the assets, rights, and bargaining record; the seller cannot turn equipment recapture into goodwill by relabeling it. Our rule for Rachel is plain: no price allocation gets accepted until the seller's CPA has tied every class to basis, depreciation history, and payment dates.

Hypothetical: Rachel reviews an $80,000 asset sale. She is 47, Lars is 49, Lars left engineering to stay home with their three children, and Rachel is a pediatric dentist. They have $1.1 million across nine old-job accounts while she considers a $600,000 group-practice buy-in.

The draft assigns $50,000 to goodwill, $20,000 to equipment, and $10,000 to a noncompete. The equipment’s tax basis is $12,000. Equipment gain is $20,000 − $12,000 = $8,000. Under the stated facts, that gain is ordinary income because it falls within the prior depreciation amount.

The $50,000 goodwill and $10,000 noncompete remain separate reported classes. They do not erase the equipment result. If the parties instead assign $30,000 to equipment and $40,000 to goodwill, equipment gain becomes $30,000 − $12,000 = $18,000.

That change creates $10,000 more ordinary-income gain, even though the total price remains $80,000. The allocation changed the tax discussion; Rachel did not create a deduction. The example matters below six figures, where an early review can prevent a surprisingly large tax mismatch.

The buy-in funds, sale proceeds, and nine existing accounts should stay visible separately until the CPA reconciles the agreement and return. Fewer accounts can make the final plan easier to explain, but simplicity comes after the tax record is correct.

At closing, lock the reporting trail

Buyer and seller generally report the agreed allocation on IRS Form 8594 in an asset sale. The signed agreement, appraisal support, and tax-return positions should match, because changing one number later can create a dispute with both the buyer and the IRS.

Cash at closing produces immediate proceeds. An installment sale can spread eligible gain recognition as payments arrive, but depreciation recapture is generally recognized in the sale year even when other gain uses installments. A note also creates collection risk; tax deferral does not make an unpaid buyer reliable.

Signing a letter of intent with a tax allocation before checking basis can put the seller in the wrong class for the entire sale. On $60,000 of equipment with $40,000 of depreciation recapture, the first $40,000 is generally ordinary income. Changing that term after closing may be impractical or require both parties to amend their reporting.

Assante Wealth Management can help keep the payment schedule, tax reserve, and investment plan together, but a CPA and attorney must review the allocation itself.

The year after closing can still change the plan

A sale can raise modified adjusted gross income for a later Medicare lookback. A closing at age 63 may affect Part B premiums at age 65 because 2026 IRMAA uses 2024 modified adjusted gross income; the Medicare Part B standard premium for 2026 is $202.90 each month, with higher premiums at listed income tiers.

If the seller dies holding an installment note, the unpaid gain is income in respect of a decedent, and heirs get no step-up in basis on it. They report gain as each payment comes in. That is why the note belongs in the estate conversation, next to the will and beneficiary forms, and not only on a tax worksheet.

Rachel and Lars should keep the sale proceeds, buy-in funds, and nine existing accounts visible separately until the tax return and purchase agreement have been reconciled. Assante Wealth Management’s focus is the downside: leave room for a bad year, a health change, or a law change before moving the proceeds into a long-term portfolio.

State rules can differ. Some states tax retirement income or sale proceeds differently, so a state CPA should check the residence and practice location.

Older sale advice misses the assets that cannot move

An older plan that treated all practice value as goodwill may fail when equipment has low basis or when personal goodwill cannot be transferred by the entity. The usual installment-sale suggestion also does not postpone every tax item, and a stock-sale analysis cannot simply replace an asset-sale allocation.

Buyer and seller may describe the same $1.2 million differently because their tax benefits differ. If the buyer’s requested split materially raises ordinary income, Kwame should price that cost before accepting the headline offer. A lower allocation to goodwill may be a negotiation cost, not a technical detail.

The reversible parts are limited. Before closing, the parties can usually negotiate the allocation, payment schedule, and continuing employment terms. After closing, correcting the agreement may require cooperation, consistent amended returns, and extra professional work.

Assante Wealth Management keeps the plan simple by showing the proposed sale, tax reserve, debt, and post-sale accounts on one page. The page is useful only after the legal and tax descriptions match the actual transaction.

When should Assante Wealth Management see the draft?

Bring the letter of intent, proposed allocation, fixed-asset schedule, last tax returns, debt list, expected closing date, and any continuing employment terms before the purchase agreement is final. The useful question is how the sale proceeds, Rachel’s $600,000 buy-in, and nine existing accounts fit after estimated taxes, not whether the headline price sounds large.

Assante Wealth Management meets with clients remotely, by video or phone, and keeps an office at 317 South Juniper Street, Philadelphia, PA 19147, United States. The comparison is educational; entity type, basis, depreciation, state rules, employment payments, and the purchase agreement can change the result, so a CPA and attorney must review the allocation.

• Letter of intent
• Proposed allocation
• Fixed-asset schedule
• Last tax returns
• Debt list
• Expected closing date
• Continuing employment terms