Selling a Medical Practice: Tax and Deal Considerations

One of the first structural questions in a medical practice sale is whether the transaction will be an asset sale or a stock (equity) sale. The answer affects which assets and liabilities transfer and how the seller and buyer model the tax consequences. Quantify the difference from the actual entity, basis, allocation, and deal terms rather than relying on a generic savings estimate.

In an asset sale, the practice sells its individual assets: equipment, patient records, accounts receivable, non-compete agreements, and goodwill. Each asset category has its own tax treatment. In a stock sale, the owner sells their ownership interest (stock or membership units) in the entity itself. The buyer takes over the entity with all its assets and liabilities.

A portion of a practice sale may qualify for long-term capital-gain rates, while other portions can be ordinary income or recapture. The 2026 long-term capital-gain breakpoints below apply to taxable income, including the way ordinary income stacks beneath capital gain:

The 3.8% Net Investment Income Tax (NIIT) applies to the lesser of net investment income or the excess of modified adjusted gross income over the applicable threshold. The thresholds are $200,000 for single filers and $250,000 for married couples filing jointly. Whether sale gain is net investment income can depend on participation, entity, and transaction facts.

Do not apply one flat rate to the entire sale. Build the projection by asset class, basis, recapture, filing status, other income, NIIT treatment, entity-level tax, and state tax.

Goodwill can be a substantial component of a medical practice sale, but its value cannot be assumed from a generic percentage. The valuation and agreement should separate transferable enterprise value from value tied to the physician's personal relationships and continued services.

Personal goodwill may exist when value belongs to the individual physician and has not already been transferred to the entity by contract. Practice or enterprise goodwill belongs to the business. The distinction is intensely factual and should be supported by contracts, state law, valuation work, and the physician's actual role, not created solely through the purchase-price allocation.

Under IRC Section 453, an eligible disposition with at least one payment after the sale year generally uses the installment method unless the seller elects out. Each principal payment carries a gross-profit percentage; interest is reported separately. Some items, including depreciation recapture, are not deferred.

An installment structure can defer eligible gain and align tax payments with cash collections. It can also produce a different rate result because other income changes by year. The tradeoffs include buyer default, interest-rate rules, collateral and collection terms, and a large first-year tax bill when recapture or non-eligible items are present.

A purchase agreement may separately allocate value to a covenant not to compete. For the seller, a separately bargained covenant is generally treated as ordinary income. For the buyer, a qualifying covenant entered into with the acquisition of a trade or business is generally a Section 197 intangible amortized over 15 years.

Goodwill may receive different seller treatment, depending on its ownership, holding period, and history. That difference creates negotiation pressure, but the parties cannot choose an arbitrary number. The allocation must reflect fair value, the actual covenant, and the rest of the agreement.

Earlier planning creates more room to clean up records, obtain valuation work, compare structures, and coordinate legal and tax decisions. The most important deadline is often the letter of intent, because it can fix economics and structure before the tax model is complete.