Selling a dental practice: how the taxes work in 2026

Goodwill is the asset, and ownership is the whole question

A general dentistry office rarely sells for its chairs and X-ray units. The bulk of the price pays for patient loyalty, referral habits and the doctor's reputation: goodwill. For tax purposes there are two kinds. Personal goodwill belongs to you as an individual and, held more than a year, is long-term capital gain under IRC 1221 and 1001. Enterprise goodwill belongs to your professional corporation or LLC, and how it is taxed depends on the entity.

If your practice is an S corporation or an LLC taxed as a partnership, enterprise goodwill still flows through to you as capital gain, so the label matters less. If the practice is a C corporation (many dental PCs formed in the 1970s and 1980s never elected S status), corporate goodwill is taxed once at the flat 21% corporate rate (IRC 11(b), 2026) and again when the cash comes out to you as a liquidating distribution (IRC 331) or a dividend. For a C corporation dentist, proving the goodwill is personal is the single biggest tax lever in the deal. Our personal goodwill sale analysis walks through the paperwork, and C corporation sale double tax shows the two layers.

Howard v. United States: the dentist who signed away his own goodwill

The leading case is about a dentist. Dr. Larry Howard of Spokane incorporated his practice in 1980 and, the same year, signed an employment agreement with a covenant not to compete in favor of his own corporation, barring him from competing within 50 miles while he held stock and for three years after. In 2002 he and the corporation sold the practice; the purchase agreement allocated $549,900 to his personal goodwill and $16,000 to a separate non-compete, and the corporation received $47,100 for its assets. He reported $320,358 as long-term capital gain on the goodwill.

The IRS recharacterized that amount as corporate goodwill and treated the money as a dividend from his professional service corporation. The district court agreed (E.D. Wash. 2010), and the Ninth Circuit affirmed in 2011: because Dr. Howard had contractually given his corporation the exclusive benefit of his services and his patient relationships, the goodwill he generated belonged to the corporation. The lesson for a dentist selling in 2026 is concrete:

• Pull your old employment agreement with your PC. A non-compete or exclusive-services clause running to the corporation points the goodwill at the corporation.
• The absence of such an agreement (as in Martin Ice Cream Co. v. Commissioner, 110 T.C. 189, 1998) supports personal goodwill.
• Sell personal goodwill in a separate agreement directly from you, with its own appraisal and its own line on IRS Form 8594.

Equipment: the Section 179 and bonus depreciation payback

Dentists buy expensive equipment: CBCT scanners, intraoral scanners, chairs, lasers, CAD/CAM mills. Most of it was written off fast with Section 179 expensing or bonus depreciation, and the One Big Beautiful Bill Act made 100% bonus depreciation permanent for property acquired after January 19, 2025 (IRC 168(k), P.L. 119-21). Whatever the buyer pays for that equipment, up to its original cost, is Section 1245 recapture: ordinary income at your top bracket, up to 37% federally in 2026 (Rev. Proc. 2025-32), not capital gain. Recapture is also reported in full in the year of sale even if you carry a note (IRC 453(i)).

Two practical points. First, the allocation in the purchase agreement drives this number, and a DSO has the opposite incentive: it wants price on equipment it can write off again quickly. Negotiate the fixed-asset allocation as hard as the headline price, using our purchase price allocation guide. Second, California never adopted federal bonus depreciation (R&TC 17250), so your California basis in that equipment is usually higher than your federal basis and the California recapture smaller. Your CPA tracks two depreciation schedules for exactly this reason; see depreciation recapture.

DSO deals: cash at close plus rollover equity

Dental service organizations backed by private equity are now the most common buyer for practices with several doctors or strong hygiene revenue. A typical DSO offer pays 60% to 80% of the price in cash at closing and the rest as rollover equity in the DSO's holding company, plus an employment agreement for three to five years.

The rollover piece is where the tax planning lives. If you exchange practice assets or practice stock for units of a DSO entity taxed as a partnership, IRC 721 can defer gain on the rolled portion. If the DSO holding company is a corporation, IRC 351 can defer it only if the transferors as a group control 80% of the corporation right after the exchange, which rarely happens when one dentist joins a large platform, so many deals use a partnership holding company or a separate contribution step. Get the rollover mechanics from deal counsel in writing before you sign the letter of intent, because a rollover drafted as a taxable purchase followed by a reinvestment gives you tax on cash you never received.

If the DSO pays part of the price over time instead, look at earn-out treatment and the installment sale of a business.

Worked example: a California dental couple

A married dentist in California sells to a DSO. Other household income is $300,000. The deal allocates $1,500,000 to personal goodwill (properly documented, no non-compete running to his PC), $220,000 to equipment that was fully expensed, and $50,000 to a new non-compete with the buyer. He materially participates in the practice, so the goodwill gain is outside the 3.8% net investment income tax (IRC 1411(c)(1), 2026); the calculator still counts the $50,000 non-compete in that base, which is the conservative reading.

For the all-cash deal the sale adds $609,096 of tax: $401,447 federal and $205,749 to California, which taxes every dollar of gain as ordinary income with a top rate of 13.3% including the 1% surcharge over $1 million (FTB, 2026). If 30% of the goodwill ($450,000) is rolled into DSO partnership units under IRC 721, the 2026 bill drops to $459,246, a $149,850 difference. That tax is deferred, not forgiven: it comes due when the DSO units are sold, and California will want its share if you still live there. See California capital gains for the state rules.

Receivables, the non-compete and the lease

• Patient and insurance receivables. A cash-basis practice has zero basis in its receivables, and receivables for services are not capital assets (IRC 1221(a)(4)). Whether you sell them to the DSO or collect them yourself after closing, the money is ordinary income.
• Non-compete with the buyer. Payments for your promise not to practice nearby are ordinary income to you, and the buyer amortizes them over 15 years (IRC 197(d)(1)(E)). The buyer gets the same 15-year write-off for goodwill, so shifting price from goodwill into a non-compete gains the buyer nothing and costs you the capital gain rate. Push back when a DSO proposes it.
• The building. If you own your office condo in a separate LLC, it is its own sale or lease. Selling it brings unrecaptured Section 1250 gain at up to 25% (IRC 1(h)(1)(E), 2026); leasing it to the DSO keeps rent coming and the gain unrealized. A 1031 exchange works for the building but never for the practice goodwill.

Why QSBS does not help a dental practice

Dentists who read about Section 1202 sometimes ask whether their PC stock can qualify for the qualified small business stock exclusion. It cannot. IRC 1202(e)(3)(A) excludes any business performing services in the field of health, and a practice whose principal asset is the reputation or skill of its people. That holds after the 2025 changes that raised the per-issuer cap for stock issued after July 4, 2025. It can matter for a dental lab or software company that sells products; see QSBS and Section 1045.

Before you sign a letter of intent, model the cash deal, the rollover, an installment sale to an associate and, if you plan to retire elsewhere, a state residency change. To see them side by side on your numbers, Get the Big Sale Tax Analysis.

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