A dental or medical practice is a professional services business with tax issues that general business guides do not address: the corporate practice of medicine doctrine constrains entity choices in most states, personal goodwill - the value attributable to an individual practitioner's relationships and skills - can be carved out of a practice sale to achieve capital gain treatment at the practitioner level, and the buy-in and buy-out structures that govern how partners enter and exit determine whether the transaction is taxed as a sale, a redemption, or a guaranteed payment. These are high-stakes decisions made once, with tax consequences that last decades.
Professional Corporation (PC) or PLLC: Required in many states under the corporate practice of medicine doctrine - only licensed professionals may own equity in a professional entity. A non-physician investor cannot own shares in a medical PC. This limits the entity options available to medical practices compared to other businesses.
C-corp vs. S-corp election: A PC or PLLC can elect S-corp status if it meets the eligibility requirements. S-corp status allows the W-2 + K-1 split that reduces SE tax on distributed profits. C-corp status subjects profits to double taxation but may be advantageous for practices with significant retained earnings or those planning an MSO structure.
MSO structure: A Management Services Organization (MSO) is a non-professional entity that provides administrative services to the professional entity, extracting profits in the form of management fees that can be owned by non-professionals (investors, private equity). Used extensively in dental group practice acquisitions.
When a dental or medical practice is sold, the purchase price exceeds the fair market value of tangible assets. The excess is goodwill. The critical question is whose goodwill it is: enterprise goodwill (belonging to the entity, taxed at corporate rates on sale) or personal goodwill (belonging to the individual practitioner, taxed at capital gain rates when sold separately by the individual).
Personal goodwill exists when the value of the practice derives from the practitioner's individual relationships with patients, their professional reputation, and their personal skills - rather than from the entity's systems, brand, or infrastructure. Courts have recognized personal goodwill in professional practice sales since Martin Ice Cream Co. v. Commissioner (1998). When personal goodwill is properly structured and documented, the individual practitioner sells their personal goodwill directly to the buyer at capital gain rates, while the entity sells its tangible assets and enterprise goodwill separately.
Associate dentists and physicians employed by a practice receive W-2 wages - FICA applies to the employer and employee. Owner-practitioners who operate through an S-corp can split income between W-2 wages (FICA applies) and K-1 distributions (no SE tax). Reasonable compensation for a dentist or physician is scrutinized by the IRS because the profession produces high income and the temptation to minimize wages and maximize distributions is significant. The IRS compares compensation to what the practice would pay an independent contractor for the same services - industry compensation surveys (ADA, MGMA) are used in audits.
Dental and medical equipment - chairs, imaging equipment, surgical tools, computer systems - qualifies for §179 expensing and bonus depreciation. A new dental practice buildout or equipment refresh can generate first-year deductions of several hundred thousand dollars. Under OBBBA P.L. 119-21, bonus depreciation is restored to 100% for qualifying property placed in service after January 19, 2025, with permanent continuation. Equipment-heavy practices that time major purchases to years with high taxable income can use these provisions to effectively zero out practice income in the purchase year.
When an associate buys into a practice, the transaction can be structured as a purchase from the existing owner(s) or as a capital contribution to the entity. A direct purchase from existing owners is a capital gain event for the sellers and gives the buyer a stepped-up basis. A capital contribution does not create gain for existing owners but gives the buyer only the cash invested as basis - no step-up for existing assets. The buy-in price typically includes a payment for goodwill, which raises the personal vs. enterprise goodwill question again. Installment sale treatment is available to the selling owners if the purchase price is paid over time.