Taxes are going up. Now may be a time to consider selling a PART of your practice to an Invisible Dental Support Organization. This may be the last time to pay only a 20% tax rate on the proceeds.
LPS urges all dentists to fully understand the potential impact on the net value of your practice in 2021 vs. 2022 and beyond. Now may be a time to consider selling a PART of your practice to an Invisible Dental Support Organization. Remain as an owner and continue to lead your practice with your brand, team, and strategy for years or decades. Benefit from the resources of a larger partner and have significant potential gains on the value of your retained ownership. This may be the last time to pay only a 20% tax rate on the proceeds.
Bottom Line if 2022 Tax Rates are Increased as Promised:
You can grow your bottom line (EBITDA) 20% in 2021 and 20% again in 2022 and monetize
your practice in 2023 and still net less after-tax than if you monetized in 2021. You will just work harder and longer to pay the government higher taxes and net less in your pocket. And can you grow your bottom line 20% for two years in a recession? What was your EBITDA growth in the boom of 2018 and 2019? Very few U.S. dentists grow their bottom line by 20% per year.
By now, everyone who is paying attention knows that President Biden has stated repeatedly that he wants to “tax the rich and make them pay their fair share” by eliminating the Long-Term Capital Gains tax preference on investments. And as a bonus, he wants to increase the top rate on ordinary income to 39.6%. Do not forget that you may also be subject to the Obama 3.8% investment gains tax as well. This could take your Federal tax bill on the sale of all or part of your practice to 43.4% in 2022. Of course, most states also add their own taxes on top of this which are only deductible against the federal taxes up to $10,000. See your state tax rates here: IRS.
To make matters even worse, California is proposing to increase its tax on investment gains from
a mere 13.3% to a new and exciting level of 14.3% on incomes over $1.0 million and scaling up to 16.8% on incomes (including capital gains) over $5.0 million. The other states may have lower rates now, but they will also climb in 2021. Income taxes, property taxes and sales taxes will also all go UP.
In 2021, the lucky doctors in California could see a tax rate of Federal and State taxes of up to 60.2% on the proceeds from the sale of part or all of their practice. Really. That is up from the relatively low 33.3% you would pay in California in 2020.
So Why Do I Send this Now?
If you have a great practice, you should understand its value today vs. its value with a 40% tax hit in 2022, 2023 and beyond. You may want to plan on selling part of your practice in 2021. To make a 2021 closing, you will want to start before July 1.
- Dentistry Unmasked: Inside the world of invisible DSOs | with Chip Fichtner - February 21, 2024
- Practice Partnership Podcast Ep 9: Top 10 Attributes to Achieve the Highest IDSO Partnership Value in ’24 - February 21, 2024
- The DrBicuspid Podcast featuring Chip Fichtner - February 6, 2024