Taxes on Selling a Medical Practice: What You Actually Keep

Asset sale or stock sale

Most physician practice sales are asset sales, Kaufman Rossin's CPAs wrote in Medical Economics. Buyers prefer them because they leave old liabilities behind and get a stepped-up tax basis they can write off. Stock sales are sometimes used to keep the legal entity, its tax ID, contracts or licenses.

For an S corporation or partnership, the gain generally passes through to you once. For a C corporation, an asset sale is taxed twice: at the corporation's flat 21% rate, and again when the cash is paid out to you as a dividend.

How the price is split: Form 8594

In an asset sale, the IRS treats each asset as sold separately, so the price has to be allocated. Buyer and seller both file Form 8594, and a written allocation in the purchase agreement binds both sides unless the IRS finds it inappropriate. The price fills seven classes in order:

The buyer writes off goodwill and a non-compete the same way, over 15 years, so it is often indifferent between them. You are not. Every dollar moved from the non-compete to goodwill is taxed at a lower rate for you. The IRS can challenge a non-compete allocation it sees as too low.

Equipment and depreciation recapture

If you have depreciated equipment and sell it for more than its tax basis, the gain is ordinary income up to the depreciation you took. Practices that expensed equipment quickly can have a large recapture bill even though the equipment is old.

Personal goodwill: the C corporation strategy

Personal goodwill is the value of your own reputation and patient relationships, as opposed to the practice's. If you own it personally, you can sell it directly to the buyer and pay one level of tax at capital gains rates, avoiding the corporate tax on that part of the price.

The leading cases are not medical, but the principle applies. In Martin Ice Cream (1998), the Tax Court held that a shareholder's personal relationships are not corporate assets when he has no employment contract with the corporation. Norwalk (1998), a CPA firm case, reached a similar result where the professionals had no non-compete with their own firm. In Howard, a dentist lost the argument: he had signed an employment agreement and non-compete with his own professional corporation, so the court held the goodwill belonged to the corporation. A federal district court decided it in 2010 and the Ninth Circuit affirmed in 2011.

ECG Management Consultants lists what supports a personal goodwill sale: no non-compete between you and your practice before the sale, a separate goodwill purchase agreement, and an independent valuation. Advisory firm Ankura showed an illustrative $40 million C corporation deal where recognizing personal goodwill cut the effective tax rate from 36.8% to 24.2%. Your numbers will differ.

If your practice converted from a C corporation to an S corporation within the last five years, the corporation can still owe built-in gains tax at 21% on gain that existed at conversion.

Non-competes, consulting and employment

Money paid for your non-compete is ordinary income. So are payments under a post-sale consulting or employment agreement, which may also carry payroll or self-employment tax. Private equity deals often lower your future pay, sometimes called the "scrape," in exchange for a larger purchase price. ECG notes that if your share of the proceeds exceeds your pro rata share, part of it may be taxed as ordinary income. See non-competes after a sale and rollover equity and earnouts.

Installment sales and earnouts

If you are paid over time, the installment method can spread capital gain over the years you receive payments. Depreciation recapture is the exception: it is taxed in full in the year of sale, even if you receive no cash that year. Earnouts can sometimes be reported on the installment method, but not always.

2026 federal rates

A practice is not eligible for the small business stock (QSBS) exclusion. Section 1202 excludes businesses performing services in the field of health.

State taxes

State tax can be the second-largest bill. California taxes capital gains as regular income, with a top rate of 13.3%. Eight states levy no individual income tax, and Washington taxes only capital gains. In an asset sale, the practice may owe tax in every state where it operates, while a stock sale is generally taxed only in your state of residence.

Questions to ask before the letter of intent

• How is the price allocated, and how much goes to the non-compete?
• Is my practice a C corporation, and do I have a non-compete or employment agreement with it?
• How much depreciation recapture is in my equipment?
• How much of the price is cash at closing versus rollover, earnout or note?
• What will I net after federal and state tax, not just the headline price?

Common questions

Related reading

• Rollover equity and earnouts
• Physician non-competes after a sale
• Medical practice valuation multiples 2026
• Get a free practice valuation
• How selling a medical practice works
• All medical practice M&A guides