Dental Practice Valuation and Sale: What Sets the Price, How It's Allocated, and How the Tax Works

A dental practice sells as a bundle of assets, and what each side keeps depends on how the price is divided among them. Under IRC 1060 buyer and seller allocate the price across seven asset classes and both report it on Form 8594. The seller pays capital gains rates on goodwill and ordinary rates on equipment recapture, supplies and the covenant not to compete. The buyer can usually expense the equipment in year one and amortizes every intangible, goodwill included, over 15 years under IRC 197. Settle the allocation before signing, because a written allocation binds both sides.

How is a dental practice valued?

By what it collects and what it earns, checked against what similar practices sold for. Brokers quote a percentage of trailing twelve-month collections. A lender or a careful buyer looks at seller’s discretionary earnings, which is net income with the owner’s pay, depreciation, interest and personal add-backs put back, and applies a multiple. Some buyers also run a discounted cash flow. The three should land close together, and when they don’t, the practice usually has a profitability problem that the collections number hides.

• Provider dependence. If the selling dentist produces nearly all of the revenue, the buyer is paying for patients who may leave with the seller, and the multiple drops. An associate already carrying part of the schedule, and a hygiene department with a working recall system, hold the number up.
• Payer mix and fee schedule. Two practices collecting the same amount can earn very different profits when one is fee-for-service and the other lives on low-reimbursement PPO plans. The earnings methods see this. The collections method doesn’t.
• Equipment age and the lease. Imaging units and sterilization equipment near the end of their service life are near-term capital expense for the buyer, and a lease with no assignment right or a short remaining term is a deal problem. Both come off the price.
• Receivables. Most dental sales leave the receivables with the seller, who collects them after closing. When the buyer takes them, they’re valued at what will actually collect.

How is the purchase price allocated between equipment, patient records and goodwill?

By the residual method in IRC 1060, reported by both sides on Form 8594. The price goes first to cash, then to receivables, supplies, equipment and the identifiable intangibles at their fair market values, and whatever is left over is goodwill. The seller’s gain on each asset and the buyer’s basis in it come from the same numbers, so a dollar moved to help one side hurts the other. That’s why the allocation gets negotiated instead of calculated.

Class	What sits here in a dental sale	Seller’s tax	Buyer’s recovery
I	Cash and bank accounts (almost never transferred)	None	None
II	Marketable securities, certificates of deposit (rare)	Gain or loss on the security	Basis in the security
III	Accounts receivable, if the buyer takes them	Ordinary income for a cash-basis seller, who has no basis in them (IRC 1221(a)(4))	Collected against the basis paid
IV	Supplies and inventory on hand	Ordinary income; the basis is usually zero because the supplies were deducted when bought	Deducted as used
V	Chairs, delivery units, imaging, CAD/CAM, computers, furniture (leasehold improvements land here too, but the buyer depreciates improvements it did not make over 39 years, since IRC 168(e)(6) limits qualified improvement property to an improvement “made by the taxpayer”)	Ordinary income up to the depreciation already claimed under IRC 1245; anything above original cost is 1231 gain	Section 179 or 100% bonus depreciation in year one, or MACRS if not expensed
VI	Covenant not to compete, patient records, practice name and phone number, workforce in place	Covenant: ordinary income. Records and name: usually left inside goodwill in a dental deal	15-year amortization under IRC 197, whatever the covenant’s term
VII	Goodwill and going concern value (the residual)	Long-term capital gain; zero basis if the seller built the practice	15-year amortization under IRC 197

• Both sides file. The Form 8594 instructions say “Generally, both the purchaser and seller must file Form 8594 and attach it to their income tax returns” for the year of the transfer, and the form asks the same questions of each, so two returns with different numbers are easy to compare.
• The written allocation binds the parties. 1060(a) says an allocation the two sides “agree in writing” is “binding on both the transferee and transferor unless the Secretary determines that such allocation (or fair market value) is not appropriate,” and Reg. 1.1060-1(c)(4) keeps the Commissioner’s authority to challenge it. Neither party can recharacterize after closing, short of proving the kind of mistake, fraud or duress that would let it reform the contract itself (the Danielson standard the regulation keeps). The IRS still can.
• Class VI in a dental sale is mostly the covenant. What changes hands with the charts is the right to keep treating those patients, a customer-based intangible under Reg. 1.197-2(b)(6). Most deals leave that value inside goodwill and price the covenant separately.
• Equipment for the buyer. Section 179 allows up to $2,500,000 of expensing for 2025 and 2026 (indexed for inflation starting 2027), phased out above $4,000,000 of purchases and capped at business taxable income; bonus depreciation under IRC 168(k) is 100% for property acquired after January 19, 2025, with no income cap, which is why a first-year buyer with a loss uses bonus. The mechanics and the state conformity traps are in the Section 179 versus bonus guide, and the rules are the same for a dental chair.
• Deal costs aren’t expenses. Reg. 1.263(a)-5 requires capitalizing “an amount paid to facilitate” an “acquisition of assets that constitute a trade or business (whether the taxpayer is the acquirer in the acquisition or the target of the acquisition).” Broker, legal and appraisal fees go into the buyer’s basis and against the seller’s proceeds, and neither side writes them off as an ordinary expense.
• Real estate is its own sale. If the dentist owns the building, sell it or lease it under a separate contract and keep it off the practice’s Form 8594.

How is the seller taxed on each piece of the price?

Three ways at once. Equipment is ordinary income up to the depreciation already claimed under IRC 1245, and since most dental equipment was expensed under Section 179 or bonus when it was bought, nearly every dollar allocated to it is recapture. Supplies and the covenant not to compete are ordinary income too. Goodwill is long-term capital gain at 15% or 20% federal, and for a dentist who worked in the practice it generally sits outside the 3.8% net investment income tax.

• The rates. Under IRC 1(h) long-term capital gain is taxed at 0%, 15% or 20%. For 2026 the 20% rate starts where taxable income passes $545,500 single or $613,700 joint (Rev. Proc. 2025-32); for 2025 returns the lines are $533,400 and $600,050 (Rev. Proc. 2024-40). The 37% ordinary rate starts at $640,600 single and $768,700 joint for 2026, and $626,350 and $751,600 for 2025. State income tax is on top of all of it.
• The covenant. In Ullman v. Commissioner the Second Circuit upheld the treatment of amounts “received by them in consideration for their covenants not to compete with the purchasers, and hence … taxable as ordinary income.” The seller is being paid to stay away rather than for an asset, so the capital gains rates never reach it.
• The 3.8% tax. IRC 1411 taxes net investment income above $200,000 of modified adjusted gross income for a single filer and $250,000 on a joint return, but its definition leaves out “net gain … attributable to the disposition of property other than property held in a trade or business,” unless that business is a passive activity for the seller or a trading business. A dentist who worked in the practice through closing generally isn’t passive in it, so the gain on the practice’s assets generally escapes the tax. A shareholder’s gain on liquidating a C corporation is gain on stock, and that is caught.
• Equipment that sold for more than it cost, which is rare for dental equipment, produces 1231 gain above the recapture, which is generally taxed as capital gain.

What’s personal goodwill, and when does it matter?

Goodwill that belongs to the dentist rather than to the practice: the patients who came for that dentist and would follow them across town. It matters most in a C corporation, which pays 21% under IRC 11 on the gain from selling its goodwill, after which the shareholder is taxed again on the cash that comes out, because IRC 331 treats a liquidating distribution as “full payment in exchange for the stock.” Goodwill the dentist owns personally can be sold straight to the buyer and taxed once.

• The authority is the Tax Court in Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998): “personal relationships of a shareholder-employee are not corporate assets when the employee has no employment contract with the corporation,” and ownership couldn’t be attributed to the corporation because the shareholder “never entered into a covenant not to compete with petitioner or any other agreement, not even an employment agreement,” that made his relationships “the property of petitioner.”
• What it takes. No employment agreement or non-compete between the dentist and the corporation. A separate purchase agreement for the personal goodwill between the dentist and the buyer, with the dentist signing the covenant personally. A valuation that splits enterprise goodwill (the location, the systems, the hygiene department, the brand) from personal goodwill on real facts about who the patients came for. A non-compete signed with your own corporation, or an employment agreement that assigned the patient relationships to it, is the document that defeats the claim, and unwinding one after the practice is listed is hard to defend.
• The money. On $600,000 of goodwill sold by the corporation, the corporate tax is 21% x $600,000 = $126,000, and the $474,000 left is taxed again in the shareholder’s hands at up to 20% plus the 3.8% net investment income tax. Sold as the dentist’s own goodwill, the same $600,000 is taxed once at the capital gains rate. Whether the 3.8% tax reaches personal goodwill sold by a dentist who was the corporation’s employee is a fact question, so plan on paying it.
• Sole proprietors, and S corporations that were never C corporations, have no second layer, so personal goodwill changes little on the federal side. It still matters when several dentists own the practice and the goodwill belongs mostly to one of them, and it changes nothing about the covenant, which is ordinary income whoever signs it.
• It’s a fact question every time. The position holds where the relationships really were the dentist’s and the paperwork never said otherwise. The dental entity structure guide covers why so few practices should still be C corporations at the point of sale.

Should the deal be an asset sale or a sale of the entity?

Almost always an asset sale, and a corporation can sometimes get the legal shape of a stock sale with the tax result of an asset sale. In an asset sale the buyer gets a fresh basis in every asset and leaves the seller’s liabilities behind. In a stock sale the seller reports one capital gain on the shares, but the buyer inherits the old basis, so there’s no new equipment write-off and no new 15-year clock on goodwill. A Section 338(h)(10) election bridges the two when the target is an S corporation and the buyer is a corporation.

• How the election works. Under Reg. 1.338(h)(10)-1 the election “may be made for T if P acquires stock meeting the requirements of section 1504(a)(2) from … the S corporation shareholders in a qualified stock purchase.” The target is “treated as transferring all of its assets to an unrelated person” in a deemed asset sale, then liquidating, and “S corporation shareholders (whether or not they sell their stock) take their pro rata share of the deemed sale tax consequences into account under section 1366.” The election is made jointly on Form 8023 “not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs,” non-selling shareholders “must also consent,” and it’s irrevocable.
• Who can use it. IRC 338(d)(3) defines a qualified stock purchase as stock “acquired by another corporation by purchase,” so a dentist buying in her own name, or through an LLC taxed as a partnership, can’t make the election; the buyer forms a corporation or the deal goes as an asset sale. A dentist’s stand-alone C corporation is out as well, since the regulation lists a selling consolidated group, a selling affiliate and S corporation shareholders as the sellers who can join, which is exactly why personal goodwill carries the weight it does for a C corporation.
• What it buys. The entity stays intact, so payer contracts, credentialing and the tax ID carry over, while the seller reports the deemed asset sale with the same recapture and capital gain split as a real one. The election doesn’t turn recapture into capital gain.
• A practice held in an LLC taxed as a partnership isn’t in section 338 at all; a sale of the membership interests runs through the partnership rules, and the buy-in version of that question is in the dental associate buy-in guide.

Can an installment sale defer the seller’s tax?

Yes for the goodwill, no for the recapture. When part of the price is a note from the buyer, IRC 453 lets the seller report the capital gain as the payments come in instead of all at closing. But 453(i) requires recapture income to be recognized in the year of the sale, so the ordinary income on the equipment is taxed in year one even if the cash arrives over five years. The seller also carries the buyer’s credit risk for as long as the deferral runs.

• The definition is wide. An installment sale is “a disposition of property where at least 1 payment is to be received after the close of the taxable year in which the disposition occurs,” and income from it “shall be taken into account … under the installment method” unless the seller elects out.
• Recapture first. 453(i): “notwithstanding subsection (a), any recapture income shall be recognized in the year of the disposition, and any gain in excess of the recapture income shall be taken into account under the installment method,” with recapture income defined as the amounts “treated as ordinary income under section 1245 or 1250.” In the example above, the $150,000 of equipment recapture is 2026 income whether the note pays out over five years or ten; the $775,000 of goodwill gain is reported as the payments come in.
• The interest charge. IRC 453A adds interest on the deferred tax when the face amount of installment obligations arising in the year and still outstanding at year end “exceeds $5,000,000.” A single-practice note is normally well under that; a multi-location sale can cross it.
• The practical rules. Keep enough cash at closing to pay the year-one tax on the recapture and the covenant, and secure the note with a lien on the practice assets and a personal guarantee. A bank-financed deal has no deferral question, since the seller is paid in full.

What should I do next?

If a sale is one to five years out, start with the entity. A C corporation needs the personal goodwill facts in order before the practice is listed, and an S corporation with a corporate buyer needs every shareholder ready to sign the 338(h)(10) consent. Get a valuation that shows all three methods, then put the Form 8594 allocation into the letter of intent instead of leaving it for the closing binder.

• The transition is contract work: a defined period where the seller keeps treating patients and introduces the buyer to patients, staff and referral sources, paid either as a contractor on a Form 1099-NEC or as a W-2 employee of the buyer’s entity. Staff stay at will, so many agreements add retention bonuses, and the covenant has to be enforceable under state law to be worth what the buyer paid for it.
• Dental practice entity structure, how the entity you’re in today sets up single or double taxation at the exit
• Dental practice deductions, the buyer’s Section 179, bonus and start-up picture after closing
• Dental associate buy-in, the same goodwill and allocation mechanics on a partial sale
• DSO management agreements, what changes when the buyer is a DSO
• Dental practice retirement plans, what a seller can still shelter in the final year
• Franchise transfers and law firm succession, the same IRC 1060 allocation in two other businesses
• Hotel purchase price allocation, another Form 8594 walk-through with real estate in the mix

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