Taxes on Selling an Ophthalmology Practice: Price Allocation
Taxes on selling an ophthalmology practice can change what a seller actually keeps far more than many physicians expect. Two offers with similar headline prices may leave very different amounts after taxes, depending on how the price is allocated among assets, how the deal is structured and whether part of the consideration is paid in cash, equity or future payments.
This article explains the main tax concepts sellers should understand when comparing a private equity offer with a sale to another physician or group. It is a general overview only. Tax rules are complex and change over time, outcomes depend on each seller’s situation, and nothing here is tax, legal or accounting advice. Sellers should work with tax advisors, accountants and healthcare counsel before signing a letter of intent.
Why Price Allocation Matters
In many practice sales, the buyer acquires assets rather than ownership shares. The total price must then be allocated among the categories of assets being sold, such as:
- Equipment, furniture and other tangible assets
- Supplies and inventory, including optical inventory
- Accounts receivable, if included
- Goodwill, which may be practice goodwill or personal goodwill
- Non-compete or restrictive covenant agreements
- Consulting or transition service agreements
Different categories can be taxed differently. Some may be treated as capital gain, while others may be taxed as ordinary income. Buyers and sellers often have opposing preferences, because allocations that benefit one side for tax purposes may be less favorable to the other. The allocation is usually negotiated and documented in the purchase agreement, and both sides generally report it consistently.
Key Allocation Issues for Ophthalmology Sellers
Equipment
Ophthalmology practices often own expensive diagnostic and surgical equipment. If equipment has been depreciated, part of the price allocated to it may be subject to depreciation recapture, which can be taxed differently from capital gain.
Goodwill
Goodwill is often a large share of the price. Whether it belongs to the practice or to the individual physician can affect taxes, especially for practices organized as certain types of corporations. Personal goodwill planning is fact-specific and should be reviewed by tax advisors and counsel.
Non-Compete Payments
Amounts allocated to a non-compete may be treated as ordinary income to the seller. Enforceability of restrictive covenants also varies by state, which counsel should review.
Consulting and Employment Payments
Payments for post-sale services are generally treated as compensation, not sale proceeds. Sellers should understand how much of the total package is truly purchase price.
Entity Type and Deal Structure
The way a practice is organized affects taxes on selling an ophthalmology practice. A sole proprietorship, partnership, limited liability company, S corporation and C corporation may each produce different results in an asset sale versus a stock or membership interest sale. In some cases, a structure that looks attractive to the buyer may create additional tax for the seller, or the reverse.
Sellers should model the after-tax outcome of each structure being proposed, not just the gross price.
After-Tax Comparison: Private Equity vs Private Sale
Private equity transactions and sales to another physician or group often differ in structure, which affects after-tax results.
Private Equity Sale
A typical private equity offer may include:
- Cash at closing, generally taxable in the year of sale
- Rollover equity, which may be structured to defer some tax until a future sale, depending on the transaction
- Earnouts or contingent payments, which may be taxed when received, may be limited by lenders or financing terms and are not certain to be paid
- A post-sale employment agreement with compensation taxed as ordinary income
Our articles on selling an ophthalmology practice to private equity and ophthalmology equity rollover explain these components.
Private Sale to a Physician or Group
A sale to an associate, partner or another practice may involve:
- Cash at closing, often funded by the buyer’s acquisition loan
- In some cases, a seller note, which may allow part of the gain to be recognized as payments are received; lenders and programs may limit seller financing, and seller notes are typically subordinate to the senior loan
- A transition or consulting period with the seller
Our article on whether seller financing can help a buyer purchase an ophthalmology practice explains how seller notes fit into a deal.
Comparing the Two
When comparing offers, sellers may want to calculate:
- Net cash after taxes at closing
- A realistic range of outcomes for rollover equity or earnouts
- The difference in post-sale compensation compared with ownership income
- The timing of tax payments
- Risks that some deferred or contingent payments may not be received
A higher headline price is not always the better after-tax result.
Questions to Ask Your Advisors
Before agreeing to a price allocation, sellers may want to ask their tax advisors:
- How would each proposed allocation affect my total tax bill?
- Is any part of my goodwill personal rather than practice goodwill?
- What state taxes apply to each part of the consideration?
- How would deferral through rollover equity or a seller note affect my overall plan?
Planning Ahead
Tax planning works best before negotiations begin. Steps may include reviewing the practice’s entity structure, organizing records of equipment and depreciation, understanding goodwill and preparing financial statements that support value. Our guides on increasing ophthalmology practice value before a sale and how to value an ophthalmology practice cover related preparation.
Final Thoughts
Taxes on selling an ophthalmology practice depend on price allocation, entity type, deal structure and the mix of cash, equity and future payments. Comparing offers on an after-tax basis, with help from qualified tax advisors, can help sellers make decisions that fit their financial and retirement goals.
US Medical Funding helps physicians evaluate sale and succession options. Learn more about our advisory and consulting services.
