Veterinary Accounting

The veterinary P&L has a shape most bookkeepers have never seen in a professional practice: a true cost-of-goods section (drugs, medical supplies, lab fees, food and retail product) sitting above wages, often consuming a fifth to a quarter of every revenue dollar. Structure the chart of accounts to match: COGS categories separated from operating expense, staff wages split between DVM and non-DVM, and revenue split by department, exam and outpatient, pharmacy, lab and diagnostics, surgery and dental, boarding and grooming, retail.

Department-level revenue matters because margins differ wildly: pharmacy and retail revenue carries heavy product cost, while exam and surgical revenue is mostly labor. A practice growing its top line through low-margin departments can add revenue for years while profit stands still, and only a departmentalized P&L shows it happening.

For taxes, small practices have flexibility: businesses under the gross receipts threshold ($32 million for tax years beginning in 2026) can account for inventory as non-incidental materials and supplies, effectively deducting product as it is used or sold, instead of maintaining full tax inventory accounting. That simplification is worth taking. What it does not do is manage the shelf, and the shelf is where practices bleed.

Drug and supply cost in a typical companion-animal practice runs somewhere around 18% to 25% of revenue, and the leak has three sources: shrinkage and expiry (product purchased that never gets billed to anyone), missed charge capture (product used in treatment but never invoiced), and quiet vendor price creep. None of them appear as line items; all of them appear as a COGS percentage drifting upward.

Controlled substances add a second ledger: DEA recordkeeping is its own compliance regime, but the financial books should mirror it closely enough that a discrepancy in either system flags the other.

Most associate veterinarians are paid on some version of ProSal: a base salary that functions as a draw against a percentage of personal production, commonly landing in the low twenties as a percentage of the revenue the doctor generates. The model aligns pay with productivity, and it creates three bookkeeping obligations that a generic payroll setup misses entirely.

First, production has to be tracked by doctor in the practice management system, with clear rules for what counts (professional services usually; food and retail often excluded or at a lower rate) and how shared cases split. Second, the monthly close must reconcile PMS production reports to the general ledger, because discounts, refunds, and missed charges make the two drift. Third, earned production bonus above base should be accrued monthly, so the P&L reflects true labor cost and the quarterly bonus is a payment, not a surprise.

Veterinary medicine is equipment-hungry: digital radiography, ultrasound, dental units, surgical suites, in-house analyzers. The tax treatment is generous. Section 179 allows expensing up to $2,560,000 of qualifying equipment for 2026, and 100% bonus depreciation is permanent for qualified property acquired and placed in service after January 19, 2025, so essentially any practice-scale purchase can be fully deducted in year one.

Because the deduction is available, the real questions are timing and financing. A $150,000 analyzer deducted in a peak-income year is worth substantially more than the same deduction in a build-out year with thin profit, and Section 179 cannot create a loss while bonus can, which affects which tool you elect. Financing does not change deductibility: equipment bought on a loan is deductible in full when placed in service even though cash goes out over five years, which front-loads the tax benefit but also means later loan payments arrive with no matching deduction except interest. Model both ends before signing.

Note the mismatch this creates in sale years: fully expensed equipment has zero basis, so a practice sale triggers ordinary-income recapture on the equipment allocation. The write-off is real, but part of it is a timing benefit that unwinds at exit, which is one more reason sale planning starts years early.

Most profitable owner-operated practices run as S corps (some states require a professional corporation or PLLC as the wrapper). The owner-DVM takes a reasonable salary, benchmarked against what an associate would earn producing the same clinical revenue plus a management premium, and receives remaining profit as distributions free of the 15.3% employment tax. On a practice netting $250,000, the structure commonly saves five figures annually versus sole-proprietor treatment, before considering payroll costs.

Veterinary medicine is treated as a health-services SSTB for the QBI deduction, so the 20% deduction phases out for 2026 above taxable income of $201,750 single or $403,500 married filing jointly, disappearing entirely at $276,750 and $553,500. Owners near those lines have real levers: retirement plan contributions, equipment timing, and the salary split all move taxable income, and coordinating them is annual planning work, not a set-and-forget election. If you own the building, hold it in a separate entity at market rent; the rental income is not SSTB income, and the separation preserves options at sale.

Run the salary and distribution math in the S corp savings calculator, and the broader owner playbook is on small business tax planning.

These six numbers, produced monthly from reconciled books and the practice management system, are the operating dashboard. They are also, nearly line for line, the diligence request list a consolidator sends after the first phone call, which is the segue to the next section.

Veterinary practices are priced on normalized EBITDA: reported earnings, restated with a market-rate salary for every owner-DVM's clinical work, personal expenses stripped out, and rent set to market if you own the building. Buyers, whether a corporate consolidator or an associate buying in, apply a multiple to that number, and the multiple itself moves with doctor dependence, growth, and the credibility of the financials. Messy books do not just slow diligence; they shrink the multiple, because every unverifiable add-back gets discounted or thrown out.

The tax side is an allocation exercise. Most deals are asset sales, and the price splits across goodwill (long-term capital gain), equipment (ordinary recapture up to prior depreciation), inventory (ordinary income), and any employment or consulting agreement (ordinary compensation). Sellers want weight on goodwill; buyers want it on equipment and consulting. The split is negotiated, reported by both sides on Form 8594, and worth modeling before the letter of intent fixes the economics.

Sale readiness, concretely: two to three years of reconciled monthly financials, owner perks already separated so add-backs are short and documented, production by doctor to demonstrate the practice is not one retiring owner's goodwill, real estate in its own entity, and equipment records with purchase dates and basis. Every item on that list is a byproduct of the monthly discipline this page describes, which is why the practices that never planned to sell often get the best offers.

Monthly, a practice owner should receive: a departmentalized P&L with a true COGS section, a balance sheet reconciled to the bank and loan statements, the six KPIs above with trend lines, a production-to-payroll reconciliation for every associate, inventory purchases versus usage with flagged drift, and a running tax projection tied to the quarterly estimate schedule. That package runs the practice day to day and doubles as a permanent diligence file.

That is what our outsourced bookkeeping team builds for practices, with CPA review layered on. Start with an accounting consultation if you want the gaps diagnosed first, and see the veterinarian hub for the full tax picture for DVMs.