Dental Practice Startup Costs: New Practice vs Acquisition and How Each Is Deducted

A dentist starting a practice faces a fork in the road that changes everything about the first-year tax return. Option one is a de novo startup: sign a lease, build out the operatories, buy equipment, hire staff, and open the doors from scratch. Option two is an acquisition: buy an existing practice from a retiring or relocating dentist, walk into a fully equipped office with active patients on the schedule, and begin treating on day one. Both paths are expensive. Both produce large first-year deductions. But the type, timing, and tax code section governing those deductions are fundamentally different, and the classification you lock in during year one follows the practice for the next 15 years. Getting it right at the outset is worth tens of thousands of dollars in year-one tax savings and avoids the headache of reclassifying costs on an amended return or a Form 3115 down the road.

What qualifies as a startup cost when opening a dental practice from scratch?

A startup cost under IRC 195 is an expense that would be an ordinary and necessary business deduction under IRC 162 if the practice were already operating, but that you’re paying before the practice opens to patients. The critical date is the “beginning of business” trigger: the practice begins when it opens to patients, not when the dentist signs the lease, not when the contractor starts demolition on the buildout, and not when the equipment is delivered. Everything paid before that date is pre-opening and must be classified into the correct bucket.

For a dental startup, the most common IRC 195 costs include pre-opening rent (the months of lease payments during the buildout period, before the practice starts seeing patients), staff wages during pre-opening training (the hygienists, assistants, and front-desk staff you hire weeks before opening to train on the practice management system, sterilization protocols, and office procedures), travel to equipment training or CE courses required before opening (manufacturer training on the CBCT unit, the CAD/CAM system, or the practice management software), pre-opening marketing (the direct mail campaign to the surrounding zip codes, the Google Ads budget before the first patient books, the website design and launch, the open-house event), pre-opening insurance (liability and property coverage that begins during the buildout), consultant fees (the practice management consultant who helps you set fees, design the schedule template, and build the hygiene recall system before day one), and market research (the demographic study of the area, the competitive analysis of other practices within a five-mile radius).

What is NOT a startup cost, even though it’s paid before the practice opens: equipment purchases (dental chairs, X-ray units, autoclaves, compressors, handpieces, the CBCT scanner) are capital assets depreciated under MACRS, not startup costs. Leasehold improvements (the operatory buildout, cabinetry, plumbing for the dental units, electrical for the compressor and vacuum systems) are Qualified Improvement Property, not startup costs. Entity formation costs (state filing fees, operating agreement drafting, initial accounting setup) are organizational costs under IRC 248 or IRC 709, with their own separate $5,000/$50,000 deduction. And supplies purchased before opening but consumed after (gloves, masks, prophy paste, composite, anesthetic cartridges) are deductible as materials and supplies when consumed, not as startup costs.

The dividing line is the nature of the expense, not the date written on the check. All of these costs hit the bank account before opening day, but each one follows a different code section and deduction timeline.

How does the $5,000 startup cost deduction work for a new dental practice?

The first $5,000 of qualifying startup costs is deductible immediately in the tax year the practice opens. But the $5,000 shrinks dollar-for-dollar once total startup costs exceed $50,000, and it disappears entirely at $55,000. For most dental startups, the total of pre-opening rent, pre-opening payroll, marketing, insurance, and consultant fees comfortably exceeds $55,000, which means the immediate deduction is often zero.

When that happens, the entire amount of qualifying startup costs is amortized over 180 months (15 years), starting in the month the practice opens to patients. If your pre-opening costs total $72,000 and the practice opens July 1, the monthly amortization is $72,000 / 180 = $400. Your first-year deduction on those costs (July through December, six months) is $2,400. That same $72,000 would produce a full-year deduction of $4,800 in subsequent years.

There is also a separate $5,000 immediate deduction for organizational costs under IRC 248 (for corporations) or IRC 709 (for partnerships and LLCs), with the same $50,000 phase-out. These cover entity formation expenses: the state filing fee, the legal fee for drafting the operating agreement or articles of incorporation, and the initial accounting setup. Because organizational costs for a dental practice rarely exceed $10,000, most dentists get the full $5,000 immediate deduction and amortize the small remainder.

The election to deduct and amortize startup costs is technically required, but a deemed election rule protects you if you don’t file a formal statement. If you don’t attach a statement to the return, the IRS treats you as having elected the $5,000 deduction plus 180-month amortization. The election, whether actual or deemed, is irrevocable. This matters if costs are misclassified: if equipment or buildout costs are lumped into the IRC 195 total, they’re locked into 180-month amortization instead of being fully deductible in year one through bonus depreciation. That error is correctable (the costs were never startup costs to begin with), but the correction involves amending the return and potentially filing a Form 3115, which is expensive in professional fees.

One subtlety worth noting: if a dentist investigates opening a practice but decides not to go through with it, the investigation costs are not deductible at all under IRC 195 (that section applies only to a business that actually begins). They may be deductible under IRC 165 as a loss if the dentist was already in business (practicing as an associate with plans to start their own practice), but for a new graduate with no existing practice, abandoned investigation costs are generally nondeductible personal expenses.

How are equipment and buildout costs handled in a de novo dental startup?

This is where the tax code is most generous to new dental practice owners. Equipment and leasehold improvements are capital assets, not startup costs, and the current depreciation rules allow the entire amount to be deducted in the year placed in service.

Dental equipment. Dental chairs ($5,000 to $15,000 each), operatory delivery units ($3,000 to $8,000 each), X-ray equipment (digital sensors at $5,000 to $10,000 per sensor, a panoramic unit at $20,000 to $50,000, a CBCT scanner at $100,000 to $250,000), autoclaves ($3,000 to $8,000), air compressors ($2,000 to $5,000), vacuum systems ($3,000 to $8,000), intraoral cameras ($2,000 to $5,000 each), cabinetry and casework ($5,000 to $20,000 per operatory), and IT infrastructure (server, workstations, network switches, cabling) at $15,000 to $40,000 for a full-practice deployment. Most dental equipment is either 5-year or 7-year MACRS property. Computers and digital imaging hardware are typically 5-year property. Chairs, delivery units, autoclaves, and general operatory equipment fall into the 7-year class.

Under Section 179, the practice can elect to expense up to $1,250,000 (2025 limit, indexed for inflation) of qualifying property placed in service during the year. The deduction phases out dollar-for-dollar when total qualifying property exceeds $3,130,000. One important limitation: the Section 179 deduction cannot exceed the practice’s taxable income from active trades or businesses. A startup practice with a net loss in year one can’t use Section 179, but it can use bonus depreciation.

Under IRC 168(k), as made permanent at 100% by the One Big Beautiful Bill Act (OBBBA, Pub. L. 119-21, signed July 4, 2025), the practice can deduct 100% of the cost of qualifying property in the year it’s placed in service. Bonus depreciation applies to new and used property with a MACRS recovery period of 20 years or less, has no dollar cap, and has no taxable income limitation. It can create or increase a net operating loss. For a dental startup that will likely report a loss in its first year anyway, bonus depreciation is the primary first-year deduction mechanism for equipment.

Leasehold improvements (Qualified Improvement Property). The operatory buildout is typically the second-largest capital expenditure after equipment. A full operatory buildout runs $75,000 to $150,000 per operatory depending on the market. A typical startup with four to eight operatories is looking at $300,000 to $1,200,000 in buildout costs. These include demolition and framing, plumbing for the dental units and sterilization area, electrical for compressor and vacuum systems, HVAC modifications, flooring, wall finishes, cabinetry installation, lighting, and data cabling.

Interior improvements to a leased nonresidential building are classified as Qualified Improvement Property (QIP) under IRC 168. QIP has a 15-year MACRS recovery period but is eligible for 100% bonus depreciation, which means the entire buildout cost is deductible in year one. A practice that spends $500,000 on the buildout gets a $500,000 first-year deduction, not $33,333 per year over 15 years.

State conformity matters. Not every state conforms to federal bonus depreciation. California, for example, does not allow bonus depreciation but permits Section 179 up to $25,000. A California dental startup that deducts $700,000 of equipment and buildout under bonus depreciation on the federal return has a very different California return. The dentist would need to depreciate those assets over their MACRS recovery periods for California purposes. This is a routine planning point, but it produces a large state-to-federal difference in year one that shrinks over the recovery period.

How is a dental practice acquisition different from a startup?

When you buy an existing dental practice, you skip the IRC 195 startup cost framework entirely (assuming you’re buying a going concern, not just buying assets to start your own practice from scratch). The purchase price must be allocated across the assets you’re acquiring under the residual method prescribed by IRC 1060. Both the buyer and the seller report the allocation on Form 8594, and inconsistent filings between the two sides are a known audit trigger.

The seven-class asset hierarchy works like this in a dental practice acquisition.

Class I is cash and cash equivalents. Usually zero in a dental practice sale.

Class II is actively traded personal property. Rarely present.

Class III is accounts receivable, if the buyer assumes the seller’s outstanding insurance claims or patient balances. Most dental practice sales exclude AR, with the seller collecting receivables after closing.

Class IV is inventory: dental supplies, lab materials, and disposables on hand at closing. Valued at fair market value, which is usually close to cost for recently purchased supplies. These are deductible as materials and supplies when consumed.

Class V is tangible personal property: the dental chairs, operatory units, X-ray equipment, autoclaves, compressors, handpieces, cabinetry, computers, and leasehold improvements. Fair market value is typically established by a dental-specific equipment appraisal. This is the most valuable class for the buyer because Class V assets are depreciable under MACRS and eligible for Section 179 and 100% bonus depreciation. Every dollar allocated to Class V can be deducted in year one.

Class VI is Section 197 intangibles other than goodwill and going concern value. In a dental practice, this includes the value of the patient charts and records (the custodianship right, not the records themselves, which belong to the patients), the practice name and phone number, the practice’s online presence and review profiles, a covenant not to compete signed by the seller, and the assembled workforce. These are amortized straight-line over 15 years under IRC 197, regardless of the useful life of the underlying asset. A five-year non-compete is still amortized over 15 years.

Class VII is goodwill and going concern value. This is the residual: the amount left over after Classes I through VI are fully allocated. It’s also amortized over 15 years under Section 197.

The allocation negotiation between buyer and seller involves competing interests. The seller wants more of the price in goodwill (Class VII), because goodwill generates long-term capital gain taxed at 0%/15%/20% plus the 3.8% NIIT, while equipment (Class V) triggers depreciation recapture under IRC 1245 at ordinary income rates. The buyer wants more in equipment (faster deduction through bonus depreciation) and less in goodwill (15-year amortization). The covenant not to compete creates a different tension: it’s ordinary income to the seller but a 15-year intangible for the buyer, so neither side has a strong incentive to inflate it. The purchase agreement should include an allocation schedule as an exhibit, and both sides should agree to it before closing.

What does the IRC 1060 allocation look like for a typical practice acquisition?

How does practice acquisition financing affect the deductions?

Most practice acquisitions are financed with a combination of the buyer’s own funds (the down payment, typically 10% to 20% of the purchase price) and a bank loan or SBA loan. The financing mechanics interact with the tax treatment in several ways.

The loan proceeds are not income. Borrowing $600,000 to fund a practice acquisition is not a taxable event because you have an offsetting obligation to repay the loan. The $600,000 does not appear as income on the return. The costs paid with those loan proceeds retain their original tax character. Equipment is still depreciable whether you paid cash or borrowed. Goodwill is still a 15-year intangible whether the purchase was funded by an SBA loan or a family loan.

Interest on the acquisition loan is deductible as a business expense under IRC 163. For dental practices, the business interest limitation under IRC 163(j) (which limits the interest deduction to 30% of adjusted taxable income) applies only to businesses with average annual gross receipts exceeding $30 million. Virtually no dental practice hits that threshold, so the limitation is irrelevant for this industry. The full amount of interest paid on a practice acquisition loan is deductible in the year paid.

SBA 7(a) loans are the most common financing vehicle for dental practice acquisitions. The typical structure is 10 years, with the buyer putting down 10% to 15%. The SBA guarantee fee (which the buyer pays) and loan origination fees are not deducted in the year paid. They’re amortized over the life of the loan. A $6,000 SBA guarantee fee on a 10-year loan produces a $600/year deduction for 10 years.

Seller financing is also common in dental practice transitions. The selling dentist carries a portion of the purchase price as a note, typically at a market interest rate with a 3-to-7-year term. The interest on seller financing is deductible to the buyer under the same IRC 163 rules as any other business loan. The principal payments are not deductible (they’re a return of borrowed capital, not an expense). One planning note with seller financing: if the interest rate on the seller note is below the applicable federal rate (AFR), the IRS may impute interest under IRC 1274, which recharacterizes part of the principal payments as interest. The practical fix is to set the interest rate at or above the AFR.

The down payment (the 10% to 20% from the buyer’s own funds) is part of the buyer’s basis in the acquired assets. It’s not separately deductible. It flows into the purchase price and is recovered through the same depreciation and amortization schedules as the rest of the purchase price.

What happens to due diligence costs if the acquisition falls through?

Before closing, the buyer incurs costs for legal review (reviewing the purchase agreement, the lease assignment, employment agreements, and any regulatory filings), accounting review (analyzing the seller’s tax returns, production reports, and overhead structure), a practice valuation or appraisal, and potentially a formal equipment appraisal. These due diligence costs follow different rules depending on whether the deal closes.

If the acquisition closes, due diligence costs are generally capitalized as part of the purchase price. They’re added to the buyer’s basis in the acquired assets and recovered through the depreciation and amortization of those assets. Legal fees allocable to the acquisition of specific assets (the lease assignment, for example) get added to the basis of that asset. Legal and accounting fees that relate to the transaction generally are allocated to goodwill (Class VII) under the residual method.

If the acquisition falls through, the treatment depends on whether the buyer was already in business. A dentist who already operates a practice and was looking to acquire a second one can deduct the abandoned transaction costs as ordinary business expenses under IRC 162, because the investigation related to an expansion of an existing business. A dentist who doesn’t yet have a practice (a new graduate, or an associate who has never owned) would treat the abandoned costs as startup investigation expenses under IRC 195. If the dentist then opens or acquires a different practice in the same year or a later year, those costs can be folded into the IRC 195 startup cost total and recovered through the $5,000/$50,000 framework. If the dentist never starts a practice at all, the investigation costs are generally nondeductible.

The distinction is fact-specific, and the key question is whether the dentist was “already in the trade or business” at the time the costs were incurred. An associate dentist who is a W-2 employee of another practice is not in the trade or business of operating a dental practice. An associate who owns a practice through an entity and is looking to acquire a second one is. The answer drives whether abandoned deal costs are immediately deductible, recoverable through IRC 195, or lost.

What are the most common mistakes in classifying dental startup and acquisition costs?

Six errors show up repeatedly on first-year dental returns. Each one either overstates the deduction (creating audit exposure) or understates it (leaving money on the table).

Treating the entire acquisition price as goodwill. When a buyer’s CPA records the $750,000 purchase price as a single line item (“goodwill” or “practice acquisition”), the buyer loses the equipment depreciation entirely. A $135,000 equipment allocation produces a $135,000 first-year deduction under bonus depreciation. That same $135,000 buried in goodwill produces $9,000/year in amortization over 15 years. The year-one cost of this error is roughly $126,000 in lost deductions. An equipment appraisal is essential, and it typically costs $1,500 to $3,000, a trivial amount relative to the deduction it supports.

Not filing Form 8594 or filing an allocation inconsistent with the seller. Both parties must report the same allocation on Form 8594. An inconsistent filing, or a missing filing, is a known audit trigger. The allocation should be part of the purchase agreement, attached as an exhibit, and agreed upon before closing.

Missing the $5,000 IRC 195 immediate deduction on a de novo startup. If total startup costs are under $50,000 (uncommon but possible for a very lean startup), the $5,000 immediate deduction is available and free. Even if the total exceeds $50,000, the dentist should still classify costs correctly, because the 180-month amortization produces a deduction every month. The worst outcome is treating pre-opening costs as personal expenses and never deducting them.

Lumping capital equipment into the IRC 195 startup cost total. A $150,000 CBCT scanner that gets classified as a startup cost is locked into 180-month amortization ($833/month) instead of a $150,000 year-one deduction under bonus depreciation. The year-one difference is roughly $145,000 in lost deductions. Equipment is not a startup cost. It’s a capital asset with its own, far more favorable depreciation rules.

Not separating the real estate from the practice sale. If the selling dentist owns the building and sells both the practice and the real estate to the buyer, the transactions should be structured and documented as separate deals. The real estate has its own depreciation rules (39-year MACRS for the building, no depreciation for the land), and its own tax treatment for the seller (Section 1250 recapture on the building, capital gain on the land). Bundling the real estate into the practice purchase price inflates the goodwill residual and overstates the intangible amortization base while losing the proper classification of the building and land.

Missing QIP treatment on the buildout. Interior improvements to a leased dental office are Qualified Improvement Property with a 15-year MACRS life and eligibility for 100% bonus depreciation. If the buildout is classified as 39-year property (the general nonresidential real property class), the first-year deduction drops from $500,000 to roughly $12,820 ($500,000 / 39). The QIP classification is available for any improvement to the interior portion of a nonresidential building that is placed in service after the building was first placed in service. It does not include building enlargements, elevators, escalators, or changes to the internal structural framework. Virtually all operatory buildout work qualifies.

Does it matter whether the practice entity is formed before or after costs are incurred?

It does, and this is a planning point that new dentists routinely miss. The entity structure should be in place before costs start hitting. If a dentist signs the lease personally, pays for the buildout out of a personal account, and forms the LLC or PLLC six months later, there’s an argument that the pre-entity costs belong to the individual and must be contributed to the entity as capital contributions. The deductions still exist, but the mechanics of claiming them become more complicated, and the IRS has occasionally challenged the timing of deductions taken by an entity for costs incurred before the entity existed.

The cleaner path is to form the entity first (the PLLC or PC, with the S-corp election filed on Form 2553 within 75 days of formation if the S-corp structure makes sense), sign the lease in the entity’s name, open the business bank account, and run all startup costs through the entity. This keeps the deduction on the entity’s return, avoids the contribution question, and establishes the entity’s basis in the assets from day one. The entity structure decision itself, including how to choose between a sole proprietorship, LLC, S-corp, and partnership when multiple dentists are involved, is covered in detail in the entity structure guide.

For acquisitions, the same principle applies with an additional wrinkle. The buyer’s entity should be in place and the purchase agreement should name the entity (not the individual dentist) as the buyer. If the individual dentist signs the purchase agreement and then assigns it to a newly formed entity at closing, the assignment must be properly documented, and the entity’s basis in the acquired assets traces back to the purchase price paid. A dental-specific transaction attorney will handle this, but the dentist and the CPA should coordinate on entity formation before the acquisition closes, not after.

What should I do next?

If you’re opening a de novo practice, classify every pre-opening cost into the correct bucket (IRC 195 startup cost, organizational cost, or capital asset) before the first-year return is filed. Set up the chart of accounts with separate categories from the beginning, and keep your equipment invoices, buildout contractor invoices, and pre-opening operating expenses in three distinct groups. Have your CPA review the classification before filing, because the IRC 195 election is irrevocable and moving costs between buckets after the fact requires an amended return or a Form 3115.

If you’re acquiring an existing practice, get an equipment appraisal before closing and negotiate the IRC 1060 allocation as part of the purchase agreement. The allocation determines your depreciation and amortization schedules for the next 15 years, and it directly controls the size of your first-year deduction. Both you and the seller must report the same allocation on Form 8594.

These companion guides cover the connected decisions:

• Dental practice tax deductions: equipment, supplies, and every expense you can write off, covering the ongoing deductions available after the startup phase ends and the practice is in normal operations
• Dental practice entity structure: LLC, S-corp, partnership, and when to change, covering the entity formation decision that should be in place before any startup costs hit
• Dental practice valuation and sale, covering the valuation methodology and IRC 1060 allocation from the seller’s and buyer’s perspectives
• Franchise startup costs: pre-opening expenses, the IRC 195 election, and what to capitalize, a parallel startup cost analysis for franchise businesses that follows the same three-bucket framework
• Restaurant startup costs: pre-opening expenses, liquor licenses, and the IRC 195 election, another parallel startup cost analysis with industry-specific variations

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.