The Taxation of Goodwill

In my previous post, Goodwill and the Sale of a Dental Practice, I covered the elements of goodwill and how to earn more of it in your dental practice. But why is goodwill important?

            When you sell your dental practice, you are really only selling a couple of major items – the physical assets and the goodwill. The physical assets are the dental and office equipment, furnishings, and technology. Real estate may or may not be included. These assets are assigned an agreed-upon fair value and, except for real estate, they rarely appreciate once they are purchased and placed into service. Any gain associated with the sale of these assets is really only a giveback of depreciation that you have taken on prior tax returns. This giveback is taxed at ordinary income tax rates as high as 39.6%.

            That leaves the primary driver of value in most practices as the goodwill. In fact, goodwill in a practice can make up as much as 90% of the practice’s total value, so the more goodwill you have, the greater the price you can command when you sell. Not only does goodwill dictate how much you can earn from the sale of your practice, the goodwill element is taxed at rates between 15% and 23.8% in 2014.

            So in order to command top dollar for your practice and to keep more of those dollars after taxes, wealth-building inside your practice starts with increasing your goodwill!