Tax Considerations of Selling Your Veterinary Practice
Today, veterinary practices are responsible for treating millions of animals, large and small. The livestock industry alone is around $80 trillion. But when most people think about veterinarian practices, they think about the smaller clinics that care for domestic pets, and maybe you are one of them. You have had a dynamic business for several years, and now you have decided to sell your veterinary practice. 1
At first, it might seem overwhelming, but with a basic knowledge of relevant tax rules, you can build a foundation of understanding that can make the process easier to analyze. The first thing to realize is how you structure the sale may impact how much money you can keep and how much might go towards taxes. The reality is that when you sell a business, you get income, and you are required to pay taxes.
ALLOCATING YOUR ASSETS
Typically the sale of a business is not a single asset but several. When sold, these assets get classified as capital assets, real property used in the industry, depreciable property used in the business, or property held for sale to the customer, such as stock in trade or inventory. The gain or loss gets assessed separately.
When this happens, each asset gets treated as being sold on its own to calculate the gain or loss. The seller typically wants to sell as many assets as possible to be treated as capital gains. The tax treatment of capital gains can help them save on their tax burden (capital gains get taxed at a lower tax, with most people paying a maximum rate of 20 percent, as opposed to ordinary income taxed at a maximum of 37 percent).
WHERE TO REPORT
Form T2125 – (Statement of Business or Professional Activities) Reports your business income and expenses. You can calculate your gross and net income or loss with this form.
Form 4797 – (The sale or exchange of property) Filed if there are realized gains from the sale or transfer of a property used for business purposes.
Form 8949 – (Sales and Other Dispositions of Capital Assets) Reports sales and other capital transactions, for example, stock, land, or artwork. The subtotals of capital gains and losses get carried over to Schedule D (Form 1040). 2
Schedule D – (Capital gains and losses) Reports long-term and short-term capital gains and losses on the sale of securities (stocks and bonds); however, in terms of the sale of a veterinary practice, a net gain on section 1231 assets from Form 4797 is entered on this form as a long-term capital gain (mentioned above).
Form 6252 – (Installment sale income) For installment payments.
Form 8824 – (Like-kind exchange) When a commercial property or investment property gets sold for a gain, and the proceeds from the sale or disposal of the property get reinvested in a similar property of equal or greater value. This is considered a qualifying like-kind exchange.
TYPE OF BUSINESS
Veterinarians provide their services through a sole proprietorship, partnership, Limited Liability Corporation (LLC), or corporation. The type of business that you have will affect how your taxes get calculated. In some cases, you could be subject to income and capital gains taxes when you sell, so it is encouraged that you seek professional guidance before making these critical decisions. 3
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Stock investing includes risks, including fluctuating prices and loss of principal.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by LPL Marketing Solutions
Tracking #: 1-05311223
Footnotes/Sources:
1. IRS - Veterinary ATG
2. 7 Tax Strategies to Consider When Selling a Business (sba.gov)
3. Small Business Forms and Publications | Internal Revenue Service (irs.gov)