Four Strategies to Minimize the Tax Impact When Selling Your Dental Enterprise
Tim McNeely CFP, CIMA
Don’t let a poor exit strategy hurt your financial future. I help dentists achieve high-value exits that build lasting wealth. Host: The Dental Wealth Nation Show | #1 Bestselling Author.
By the author of the #1 best-selling book, “Dental Wealth Nation."
Key Insights:
As a relentless dental entrepreneur, you have devoted immense time, energy, and resources into building your business. One day, you may decide to sell your enterprise, transitioning into another exciting stage of your life.
In this process, it would be prudent to plan your exit in a way that softens the tax impact while preserving your true wealth. Despite variances in ambitions and methods, dental entrepreneurs commonly agree on one thing: adeptly managing tax liabilities to maximize the financial gain for themselves and their families when selling their establishments.
The encouraging news: There are several tactics that could potentially help reduce taxes on your business sale. However, legal guidelines and regulations around these strategies can fluctuate with shifting political scenarios, making it critical to stay informed about tax-related updates pertinent to your business.
Let's explore some methods to lower the tax burden when you're ready to pass on your dental practice to new management.
Periodic Asset Transfers If you have successors who will inherit your business someday, you can begin transferring ownership to them now. Individuals can transfer up to $17,000 (or $34,000 for married couples) of their company stock to each child per year, without incurring taxes.* This basic approach may not thoroughly transfer ownership to your successors due to the yearly gifting limits, but it's a start towards tax mitigation.
Installment Sales A business sale could lead to substantial profit that moves you into a higher income tax bracket. To circumvent this, you could opt for an installment sale, receiving payments from the buyer over time instead of a lump sum. This approach would distribute the tax liability over several years.
However, the installment period duration could impact your risk exposure. If the new owner mismanages the business, you could potentially receive less than anticipated. Also note, changes in capital gains tax laws could affect the viability of installment sales.
Opportunity Zones An alternative tax-advantaged option involves reinvesting the sale proceeds into a qualified opportunity zone fund. These funds incentivize investors to support economically underprivileged areas. If you reinvest the sale gain in such a fund within 180 days, it is possible to defer the capital gain tax until December 31, 2026, and even eliminate it if the investment is held for over ten years.
Charitable Remainder Trusts (CRTs) If you're philanthropically inclined and wish to minimize taxes from your business sale, a charitable remainder trust (CRT) could be ideal. You would irrevocably gift part or all of your business to a CRT created to support one or more charitable organizations, which could sell the business interests tax-free.
A CRT could potentially eliminate capital gains from your business sale, provide a charitable income tax deduction, and deliver regular income taxed at a comparatively lower rate. This option, however, demands a firm commitment to philanthropy as the assets transferred to a CRT are irrevocable.
While the four methods outlined here offer tax-optimization solutions for dental entrepreneurs preparing to sell their businesses, keep in mind that various other resources may also be available. Tax reduction strategies are continually evolving, and it is always wise to connect with your trusted advisors to stay updated on the latest developments.
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