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Delineation of Various Practice Assets

[By Dr. Charles F. Fenton III JD PC]

The final purchase price of a medical practice upon sale will actually be the amalgamation of various assets of the practice.

These assets include the tangible and intangible assets. The tangible assets include the hard assets (such as computers, treatment tables, chairs and furniture, DME and x-ray machines, etc) and the soft assets (such as Q-tips, paper and cotton balls). The intangible assets will include going concern value, goodwill, and the value of any restrictive covenant.

The parties should delineate the allocation of the purchase price amongst those various categories to reach a mutual best fit with the potential tax obligations. The buyer is the one who should strive to make the allocation fit his needs as best as possible.

Generally, the sale of the assets will be ordinary income to the seller and taxed at the seller’s usual rate. The buyer will be able to depreciate the purchased items. However, the characterization of those assets and the allocated portion of the purchase price will determine how much can be depreciated and over what time period the items can be depreciated.

As a general rule, soft assets can be depreciated fully in the year of purchase. Generally, hard assets can be depreciated over a three to seven year time period, depending upon the class of the asset. Also, under Section §179, a certain dollar amount can be “expensed” or deducted in the year of purchase. The sooner and the faster that the assets can be deducted the less current taxes that the buyer will be required to pay. However, intangible assets generally must be deducted over a 15-year period. This prolongs the tax benefits of any payments characterized as such.

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Nonetheless, purchase of the assets results in better tax consequences that purchase of the stock of the practice. When stock is purchased, there is no depreciation allowance allocated in the current or subsequent years. Instead, the cost of the stock becomes the “basis” of the buyer in the practice. Any gain or loss from that basis will only have tax benefits or tax consequences in the year that the stock is sold or becomes worthless.

Because of the tax consequences of the characterization of the allocations of the purchase price, it is important that the agreement delineate the portion of the practice price which is allocated to each category. Each party should further agree never to claim a different allocation in any future tax filings.

Assessment

Generally, the soft and hard assets will be valued at their current actual cash value. In no event should the purchase price allocated to the soft and hard assets exceed the actual initial cost that the seller paid for the item. The only exception to the foregoing would be if the sale involved the transfer of an appreciable asset.

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Filed under: Practice Management | Tagged: Charles F. Fenton, medical practice sale, medical practice valuation |