The Key to a Secure Retirement Post-Sale: Knowing & Planning for Taxes
When you sell your vet practice, the amount you actually take home will be reduced by your tax bill, which generally falls between 20 to 35 percent of the cash you receive. This percentage depends on the state you live in and the advice you get. Taxes are a part of life, funding our government and its strong economic system. Knowing how much you’ll owe the government is necessary for figuring out your retirement proceeds after a business sale.
The structure of your business plays a significant role in determining your tax bill. For simplicity, let’s assume your hospital is an S-Corporation or an LLC. If it’s a C-Corporation, there are more complicated tax issues that your accountant and advisors will need to handle.
Ordinary Income vs. Capital Gains
Capital gains taxes are generally much lower than taxes on wages or regular income. Here’s how it works:
When you own an asset for over a year and then sell it, you earn a long-term capital gain. This means the profit you make from selling the asset is taxed at a lower rate than regular income. For instance, if you bought your veterinary practice in 2001 and sold it in 2023, you’ve owned it for over a year. Most of the profit you make from selling it will be considered a long-term capital gain.
The amount you originally paid for your practice is called your “basis” or original investment. Over time, this basis amount can change (sometimes it can even decline) based on how your accountant handles your taxes. If you paid a lot to buy the practice, this basis can help reduce your tax bill. You’ll only pay taxes on the profit above your original purchase price.
Ordinary Income vs. Capital Gains
Income Tax is the money you pay on all the earnings you recieve over the entire calendar year.
Capital Gain Tax is what you pay on the profit you make from selling or transferring any capital assets.
The benefit of long-term capital gains are that they’re taxed at a much lower rate than regular income. The maximum tax rate for long-term capital gains is 20 percent, compared to 37 percent for ordinary income. This means that if you can claim capital gains (which most veterinary practices should), you’ll save a lot on your tax bill.
Note: Besides the 20 percent federal tax on capital gains, there may be an extra 3.8 percent tax on certain capital gains, known as the Net Investment Tax or ‘Obamacare surcharge.’ You and your advisors need to check if this additional tax applies to the sale of your practice (it should not apply for most practice owners!).Â
Yet, other pieces of the veterinary practice sale will be categorized and treated as ordinary income. They are:
Non-Compete Agreements
Any money you get from non-competition agreements is considered ordinary income because it’s tied to you personally. Since ordinary income is taxed at a higher rate, it’s important to negotiate a low dollar amount for your non-compete provision to minimize your tax burden.
Depreciation Recapture
Depreciation recapture is a complex concept that deals with the value of the fixed assets in your practice. It usually makes up a small percentage of the total purchase price. To reduce your tax burden, it’s important to minimize the amount of money allocated to your fixed assets.
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State Taxes & Their Impact
Your tax bill can really vary based on the state where your practice is located. If your practice is in a state with no state income tax, like Florida, Texas, or Nevada, you’ll only need to pay federal taxes.
However, in high-tax states like California, where the maximum state tax rate is over 13 percent, you might end up paying up to 35 percent of your proceeds to federal and state governments. In these high-tax states, there are some ‘mechanisms’ to reduce or mitigate your taxes, but they require a thorough understanding of transactions and specific tax laws.
What is Taxed at Closing?
In most transactions, you generate taxable income when you receive cash. Current transaction structures can include various elements like TopCo equity in the buyer, joint venture interests in your hospital, contingent notes, and earnouts.
The basic rule of thumb is that you owe taxes when you receive the money. For example:
- If you receive 15 percent of the purchase price in TopCo shares (or units) of the buyer, you won’t pay taxes on that part until the buyer does a recapitalization or sale and you get cash for those shares.
- If you keep a 20 percent ownership stake in your hospital, you’ll only be taxed on the cash you receive for the part of the business you sold. When you sell the remaining 20 percent in the future, you’ll be taxed at that time.
To let your assets grow on a pre-tax basis, you can defer some of the purchase price through TopCo shares or a joint venture interest in your veterinary hospital.
Case Study:
Dr. LeeAnn Dumars
- Sold as part of a “Group” with other practices
- Included their key Associate Veterinarians
- Achieved long-term ease and eventual property sale.
Your Best Bet: Choosing Advisors with Tax Deferral Expertise
Not all accountants and attorneys have the experience needed to help owners sell their veterinary practices, which can lead to missed opportunities for tax savings. By choosing advisors with extensive transaction experience, you can maximize the amount of money you keep from your sale.
After you sign the Letter of Intent (LOI) with a potential buyer, it’s a good idea to ask your tax accountant for an estimated tax bill for the transaction. This estimate will give you a clear picture of how much money you’ll actually take home. Getting this information early and sharing it with your attorney and broker allows your entire team to explore and implement effective tax minimization strategies.
At Ackerman Group, we’ve brokered over 260 transactions, worked with different types of accountants and attorneys, and navigated every possible scenario in the veterinary acquisitions space. We have a reliable network of quality advisors we can connect you to so that you can retain the largest possible piece of your transaction proceeds.
Keep more from your sale, partner with Ackerman Group to connect with tax-savvy advisors and maximize your proceeds.