February 9, 2024

Understanding the Allocation of Purchase Price in a Dental Practice Asset Sale

By Brad Gilmore, Partner, Advisory Services

Understanding the Allocation of Purchase Price in a Dental Practice Asset Sale Dental Services

The sale or purchase of a dental practice is a significant financial and professional milestone. A crucial aspect of this transaction process is the allocation of the purchase price among the various assets of the dental practice. This process, known as ’purchase price allocation,’ is not only important for the buyer and seller but also for tax and accounting purposes.

Understanding Purchase Price Allocation

Purchase price allocation is the process of dividing the total purchase price among the different assets that make up the dental practice. These assets could include equipment, supplies, goodwill, and patient records, among others. The goal is to assign a fair market value to each asset, reflecting its worth accurately.

Significance of Purchase Price Allocation

The allocation of the purchase price can significantly impact the buyer and seller’s tax obligations. For instance, tangible assets like equipment are typically depreciated over a period of time, while intangible assets like goodwill are amortized. This depreciation or amortization can provide tax benefits to the buyer. On the other hand, the seller may have to pay taxes based on the type of asset and the gain realized from the sale. The gain on the sale of tangible assets is taxed at ordinary tax rates, while the gain on the sale of intangible assets is taxed at long-term capital gains rates.

Key Assets in a Dental Practice Sale

Tangible assets

Dental Equipment: Includes chairs, tools, and other machinery necessary for dental operations. The value of the equipment is often based on its current condition and market value.

Office Furniture and Fixtures: Includes desks, chairs, waiting room furniture, and other decor. The value of the furniture and fixtures is often based on its current condition and market value.

Supplies: Includes dental supplies on hand at the time of the sale. The value is typically the cost of replacement.

Intangible assets

Goodwill: This intangible asset represents the practice’s reputation and patient relationships. It is often the most significant portion of the purchase price.

Patient Records: These are valuable as they represent potential future income for the buyer. They are often valued based on the number of active patients and the potential revenue they could generate.

Final Thoughts

The allocation of the purchase price in a dental practice asset sale can be complex and requires careful consideration. It is essential for both parties to engage the services of experienced advisors, including accountants and lawyers, to ensure a fair and accurate allocation. Moreover, it is crucial to remember that the allocation must be agreed upon by both parties and accurately reflected in the sale agreement to avoid potential disputes or adjustments in the future. In addition, both the seller and buyer are required to include Form 8594 with their tax return to document the allocation of the purchase price and other terms of the transaction.

Understanding purchase price allocation is crucial in a dental practice sale. It not only ensures a fair distribution of assets but also plays a significant role in the financial and tax implications affecting both the buyer and the seller. Therefore, it is imperative to approach it with diligence, fairness, and professional guidance.