Ophthalmology Business

FEB 2013

Ophthalmology Business is focused on business topics relevant to the entrepreneurial ophthalmologist. It offers editorial, opinion, and practical tips for physicians running an ophthalmic practice. It is a companion publication of EyeWorld.

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• Sale of stock – Taxed at the capital gains rate • Value of the covenant not to compete – Taxed at the capital gains rate • Value of training – Taxed at the ordinary income rate (and subject to FICA) Given the current U.S. tax structure, it is most beneficial for a seller to have most—if not all—of the purchase price allocated to the value of the stock, since the capital gains rate is currently substantially lower than the ordinary income rate. Asset transaction An asset sale requires that the purchase price be allocated among the assets being purchased, and this allocation is where the tax consequences are a factor. The buyer and seller must agree on the allocation and follow the Internal Revenue Code (IRC) Section 1060 and Reporting Requirements (Form 8594). An allocation cannot be extreme to unduly benefit either party as it must be justifiable and defendable if reviewed by the IRS. Everyone's situation is different. I have had seller's not care about the tax consequences of a sale because they had losses to carry forward in other areas that would offset the gains from a sale. I have also had sellers realize they would take home much less than they anticipated from the fair market sale of their practice and have to alter their expectations accordingly. Only you and your tax advisor know the specifics of your situation. If the practice seller is a sole proprietorship, a partnership, or an S-corporation, taxes will be paid on any profits from the sale. The level of tax rate paid varies according to the asset being sold. In general, the following are the assets typically involved with a description of the applicable tax rate: When selling a practice, one of the most important factors to consider—but often the last one addressed—is the tax consequences resulting from the sale. • Covenant not to compete – The value of a non-compete can vary state to state, based on each state's statutes and enforceability. That aside, when considered personal to the seller, this is taxed at the ordinary income rate. • Training/consulting agreement – Considered personal to the seller and taxed at the ordinary income rate (and subject to FICA) • Tangible property (trade fixtures, furniture, equipment) – Monies first received are considered recaptured depreciation and taxed at the ordinary income rate. Monies received in excess of depreciation are taxed at the capital gains rate. • Trade name – Taxed at the capital gains rate • Office lease – Assuming the lease is at or below market rate, the allocation would be for the capital gains rate. • Registered vehicles – If owned more than one year, monies first received are considered recaptured depreciation and taxed at the ordinary income rate. Monies received in excess of depreciation are taxed at the capital gains rate. • Patient lists/records – Taxed at the ordinary income rate • Goodwill – The sale of personal goodwill is taxed at the capital gains rate. • Inventory – Taxed at the ordinary income rate if sold over basis value • Leasehold improvements – Monies first received are considered recaptured depreciation and taxed at the ordinary income rate. Monies received in excess of depreciation are taxed at the capital gains rate. Accounts receivable You may have noticed that accounts receivable were not listed above. Years ago sellers may have included A/R in the sale of their practice. However, the advent of managed care has brought that practice to an end. The reason for this is that the work was performed under the seller's provider number, not the buyer's. As such, an insurer is under no obligation to pay the seller's A/R to a buyer if a buyer tries to collect. Sellers are better off keeping A/R out of the transaction and collecting those monies themselves. Summary All doctors need to be aware of the possible tax consequences of selling their practice. All too often, those tax consequences are the last area addressed in a sale, and they can sometimes come with surprising results. A seller should consult his or her accountant and business broker to ensure an allocation that is as favorable as possible, while still being reasonable to a buyer and defendable to the IRS. OB Editors' note: Mr. Ruden is a certified valuation analyst, MedPro Consulting & Marketing Services, Scottsdale, Ariz. Contact information Ruden: 602-274-1668, bruden@medprocms.com February 2013 • Ophthalmology Business eZine 17

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