Starting or Buying a Medical Practice: Startup Costs, Purchase Price Allocation, and Tax Planning

Opening a brand-new practice from scratch and buying an existing one are taxed almost as differently as two paths to the same destination can be. A new practice’s pre-opening costs, market research, staff recruiting, lease negotiation before the first patient walks in, fall under the startup expenditure rules of IRC 195, a limited current deduction with the rest amortized over 15 years. A purchased practice instead requires allocating the entire purchase price across specific asset categories, equipment, patient records, goodwill, a non-compete agreement, each with its own tax treatment and, for the intangibles, a 15-year amortization period under IRC 197 that’s completely different from how those same dollars would be treated if the practice were built from the ground up instead of bought.

How are startup costs for a brand-new practice treated?

Costs incurred before a new practice actually begins operations, before it sees its first patient or opens its doors for business, don’t get to be deducted the way an ongoing operating expense would. IRC 195 treats them as capital expenditures subject to a specific deduction-and-amortization schedule.

• Qualifying startup costs include market and feasibility research, costs of securing prospective patients or referral relationships, staff recruiting and pre-opening training, travel to scout locations, and professional fees (legal, consulting) related to launching the practice, but only costs that would have been deductible if paid by an already-operating business, and only if paid or incurred before the practice actually begins its active trade or business.
• Up to $5,000 of these costs can be deducted in the year the practice begins operations, but that $5,000 allowance phases out dollar-for-dollar once total startup costs exceed $50,000, disappearing entirely at $55,000. Any amount not immediately deductible is amortized ratably over 180 months (15 years) starting in the month the practice begins operations.
• A practice with modest startup costs (say, $20,000 in pre-opening consulting and recruiting fees) gets the full $5,000 immediate deduction plus $15,000 amortized over 15 years (about $1,000 a year). A practice with $80,000 in startup costs gets no immediate deduction at all (phased out entirely above $55,000) and amortizes the full $80,000 over 15 years instead.
• Organizational costs, the costs of actually forming the legal entity itself (state filing fees, legal fees for drafting the operating agreement or bylaws), are a separate category with a parallel structure: IRC 248 for a corporation or IRC 709 for a partnership, each with its own $5,000 immediate deduction (subject to the same $50,000 phase-out) and 15-year amortization for the remainder. Startup costs and organizational costs are tracked and elected separately, even though they often occur around the same time.
• Equipment purchased to open the practice is not a startup cost under 195 at all; it’s ordinary depreciable property, eligible for Section 179 or bonus depreciation the same as equipment bought by an established practice, covered in our physician tax deductions guide.

Why does purchase price allocation matter for acquisitions?

Buying an existing practice means the buyer isn’t building anything from scratch; the buyer is acquiring a bundle of specific assets, tangible equipment, patient charts, the practice’s name and referral relationships, and often the seller’s agreement not to open a competing practice nearby. IRC 1060 requires both the buyer and the seller to allocate the total purchase price across specific asset classes using the “residual method,” and both parties report that allocation on Form 8594, filed with their respective tax returns.

• The residual method assigns value first to cash and cash-equivalent assets, then to certificates of deposit and marketable securities, then to accounts receivable, then to tangible property (equipment, furniture, inventory), then to intangible assets other than goodwill (patient lists, non-compete agreements, trade names), with any amount remaining after all of those categories are exhausted allocated to goodwill and going concern value last.
• The buyer and seller are required to use consistent allocations; the IRS can and does compare the two Form 8594 filings, and a mismatch (buyer allocating heavily to a fast-amortizing category while the seller reports differently) is an easy audit flag. The allocation should be negotiated and agreed to as part of the purchase agreement itself, not decided independently by each side after closing.
• The allocation isn’t just a paperwork exercise, it drives real, different tax outcomes for the buyer and the seller on nearly every category, discussed below.

How is each asset category treated after allocation?

Each bucket in a practice acquisition has its own depreciation or amortization life, and getting the allocation right (or wrong) changes the buyer’s deduction timeline by years.

• Tangible equipment and furniture (exam tables, diagnostic equipment, computers, office furniture) is valued at fair market value and depreciated under normal MACRS rules based on its asset class, generally 5 or 7 years, and is eligible for Section 179 or bonus depreciation the same as newly purchased equipment, meaning a buyer can often expense most or all of the equipment allocation in the acquisition year itself.
• Accounts receivable acquired in the deal (if the buyer is purchasing the seller’s outstanding patient and insurance receivables along with the practice) is valued at its collectible amount; any shortfall between the allocated value and what’s actually collected can generate a bad debt deduction for the buyer, but the receivable itself isn’t an amortizable intangible.
• Patient records and patient lists are intangible assets under IRC 197, amortized straight-line over 15 years (180 months) regardless of how long the practice actually expects the patient relationships to generate revenue, a rule that surprises buyers who assume a shorter, more “economically realistic” amortization period is available. It isn’t; 197 fixes the period at 15 years for nearly all acquired intangibles in a trade or business acquisition.
• Goodwill and going concern value, the residual amount left after every other category is valued, is also amortized over 15 years under 197. This is where the Norwalk line of reasoning about personal versus practice (or “entity”) goodwill becomes relevant, covered in depth in our practice sale guide: a seller’s personal reputation and patient loyalty, as distinct from the practice’s transferable brand and systems, can sometimes be carved out of the deal (or structured as a separate personal consulting or non-compete payment to the seller individually) rather than folded into practice goodwill, which changes the character and timing of the seller’s income even though it doesn’t change the buyer’s straight 15-year amortization on whatever is allocated to entity goodwill.
• A covenant not to compete from the selling physician is also amortized by the buyer over 15 years under 197, even if the covenant’s actual contractual term is much shorter, say, two or three years. This mismatch (a short real-world restriction, a mandatory 15-year tax amortization period) is a frequent point of confusion; the covenant is valuable to the buyer for only a few years in practice, but the tax code amortizes the cost over 15 regardless.

How does an SBA loan factor into the tax picture?

Most practice acquisitions and a meaningful share of new-practice startups are financed through an SBA 7(a) loan, since conventional bank financing for a practice with no operating history (startup) or for an intangible-heavy purchase price (acquisition, where goodwill often makes up more than half the deal) is harder to obtain on comparable terms.

• Loan principal is never deductible, regardless of what the loan financed; only interest is a deductible expense, under IRC 163, and only to the extent the loan proceeds were actually used for business purposes (the interest tracing rules matter if any portion of an SBA loan was used for a mixed business-and-personal purpose, which is uncommon but not impossible in a practice acquisition that includes, say, real estate with a personal-use component).
• SBA loan fees (the guarantee fee, packaging fees) are generally treated as loan origination costs, amortized over the life of the loan rather than deducted immediately, similar to points on a mortgage.
• The interest deduction on acquisition debt is separate from, and doesn’t change, the amortization schedule on the underlying assets purchased with the loan proceeds; a buyer financing the goodwill portion of a deal with an SBA loan still amortizes that goodwill over 15 years under 197 regardless of how the purchase was funded, while deducting the loan interest separately as it accrues.
• For a new practice, working-capital and equipment lines drawn during the startup phase generate interest expense during a period when the practice may have little or no revenue yet; that interest is still currently deductible against other income (or contributes to a net operating loss carried forward under IRC 172) even though it isn’t itself subject to the 195 capitalization rules that apply to the non-interest startup costs described above.

How does startup treatment differ from acquisition?

For a new practice, track every pre-opening cost against the $50,000/$55,000 phase-out thresholds before the practice opens, since costs that push total startup expenditures past that line lose the immediate $5,000 deduction entirely, and in some cases it’s worth timing discretionary pre-opening spending (deferring a cost that could just as easily be incurred after opening day) to stay under the threshold. For an acquisition, negotiate the purchase price allocation as an explicit term of the purchase agreement, not an afterthought handled separately by each side’s accountant after closing, and get the equipment appraised realistically rather than letting it default to a token allocation, since that allocation is the fastest-depreciating category available. Settle the entity structure the practice will operate under before or alongside this allocation, since it changes who reports the income.

Related guides:

• Medical practice entity structure: PC, PLLC, and S-corp election, the entity decision that should happen before or alongside a startup or acquisition
• Tax deductions for physicians: equipment, CME, and malpractice insurance, for the Section 179 and bonus depreciation mechanics on the equipment allocation
• Selling a medical practice: goodwill, non-competes, and capital gains treatment, the seller’s side of the same transaction
• Should a physician own or lease office space?, for the real estate question that often accompanies a practice acquisition

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