Article

What potential capital gains changes mean for your dental practice sale: four scenarios

Oct. 27, 2021 · Authored by Christopher R. VanStraten

This article was originally published by ADA Practice Transitions (ADAPT).

The proposed spending bill currently making its way through legislation brings with it some big changes to capital gains tax rates. What does this bill mean for dental practice owners looking to sell?

For nearly the past decade, the top tax rate on capital gains has remained steady at 20%; however, the proposed $3.5 trillion spending bill currently making its way through Congress includes substantial changes to capital gains tax rates that would significantly affect the tax burden for someone selling their dental practice. That may influence whether and when they want to sell.

Selling a practice has always been a complex decision that generates many previously unthought-of questions for practice owners. One of the most important being:  What will the tax implications be from the sale?

The answer to that question has many different facets, but the most impactful would be capital gains tax in regard to selling capital assets or, in this case, a practice. Capital gains refers to the increase in value of a practice from the date purchased (or started) to the date sold. Prior to this proposed legislation, upon the sale of the asset, these gains become realized or taxable and are subsequently taxed at the preferential capital gain tax rates of 0%, 15% or 20% based on one’s respective income brackets.

The tables below summarize and compare the current law to the latest proposed changes in the House Ways and Means bill as it relates to some potential capital gains changes for individuals.

In addition, the current version of the proposed bill implements an expansion of the 3.8% net investment income tax. For single taxpayers with taxable incomes over $400,000 ($500,000 for joint filers), net investment income would include income derived in the ordinary course of a trade or business regardless of whether the taxpayer materially participates.

Four sample scenarios

The following scenarios show the effect of the proposed changes on the amount of capital gains tax from the pass through of capital gain to the owner associated with the sale of their practice:

Scenario 1 (no change to tax code):

DDS (Doctor), who files married filing jointly, sold his practice prior to the implementation of the proposed law and realized $1 million of capital gain.  He has no other income. What would be the capital gains tax?

Answer: DDS will be assessed a $162,800 capital gains tax liability associated with the sale calculated as follows:

($80,800 x 0%) + ($420,800 x 15%) + ($498,400 x 20%) = $162,800

Scenario 2:

Assume the same facts and circumstances as scenario 1 except DDS delayed the sale until after the  proposed law took effect  (potential date new rates become effective is Sept. 13, 2021). What would change?

• DDS will now be assessed a 25% tax liability on the excess gain over $450,000

Answer: The doctor will be assessed a $231,420 capital gains tax liability associated with the sale calculated as follows:

($77,200 x 0%) + ($372,800 x 15%) + ($550,000 x 25%) + ($1,000,000 x 3.8%) = $231,420

Scenario 3:

Let’s look back at Scenario 2 from above and assume, instead of having no other income, the selling DDS now has $600,000 of other income in addition to the $1 million capital gain from the sale of the practice. What would change?

Answer: DDS will be assessed a $288,000 capital gains tax liability associated with the sale calculated as follows:

($1,000,000 x 25%) + ($1,000,000 x 3.8% NIIT) = $288,000

As we can see in the above scenarios, based on simplified facts and circumstances,  

For more information on this topic, or to learn how Baker Tilly dental practice specialists can help, contact our team.