Practice buy in

[eyeballz]

Would like some advice before I discuss with my CPA and Lawyer.

Plan to buy 50% of a solo owned surgical subspecialty practice. Revenue last year was 2.8mil up from 2.3 mil in 2020. Practiced owned by single physician and I am only other associate. Purchase price negotiable (650k-850k ballpark) for 50% ownership. Would be equal base salary of both partners and keep what your bring in after we split overhead. He would prefer I get loan from bank for buy-in. I would prefer practice take out of my bonus every year over 5-10 years. We will probably meet somewhere in middle on negotiations. My question is regarding peoples experiences with selling or purchasing a practice. If he does my buy in through the practice would it be more tax efficient for him or less? Obviously writing a large check for them is nice but they will still pay capital gains rates on the purchase. Is there a way were we both minimize our tax and interest burden? Thank you.

[jfoxcpacfp]

Under installment sale reporting (over a period of years), the gain on the sale of certain assets can be spread over a period of years, potentially lowering LTCG taxes for the seller. Goodwill, typically the asset to which the most value is allocated, qualifies for this treatment. “Hot assets” such as inventory and A/R, do not.

I suspect, however, that your future partner will be in the 20% LTCG tax bracket regardless of how this is structured and it is more of a cash flow/timing issue for him.

The presumption that you will be able to lower taxes by withholding the payment from your bonuses is incorrect. The income is imputed to you, even if not paid outright.

Of course, I am assuming this is an asset, not stock, sale. Stock sales do not qualify for installment sale treatment, either and I am assuming the sale d/n qualify for section 83(b) treatment, either. In that scenario, you would be asking your partner to finance the sale of 50% of the practice and the IRS w/require him to charge interest on the outstanding debt. This might be higher than what he could get in a savings account and lower than what you would pay the bank but I would guess he has other plans for the money than a low-interest savings yield.

Lot to parse here. The sales agreement and the employee (if s-corp)/partner (if partnership) agreement are at least as important as the payment terms.

[toofy]

Agreed. Someone has to eat the tax nut. Also, how was the practice valuation calculated to arrive at the purchase price?

[zlandar]

If you are thinking you can redirect your share of the owner profit to the other partner pretax you cannot. You own 50% of the practice and owe taxes on 50% of the net profit. It doesn’t matter when and even if you receive the money. It only matters what quarter the practice made the profit and taxes are owed at the end of the quarter.

Does the owner have to charge interest if he decides to finance part of the buy-in? My group is considering giving 0% loans for associates during their buy-in.

[jfoxcpacfp]

Does the owner have to charge interest if he decides to finance part of the buy-in? My group is considering giving 0% loans for associates during their buy-in.

Yes. Interest s/b imputed on a so-called 0% loan.

[eyeballz]

Thank you all for the information. I was unaware of imputed interests. Sounds like we will both pay similar taxes no matter what and I will pay interest no matter what. The buy in was calculated by valuation of our collections over past two years and projected growth. Its a 20 page document that is a bit over my head and I will review with CPA/lawyer. The value is roughly 50% of our combined collections over the past two years averaged. I would be purchasing 50% of the value.

[White.Beard.Doc]

How did you come up with the purchase price?

[zlandar]

Yes. Interest s/b imputed on a so-called 0% loan.

Very helpful. So looking up the IRS:

https://www.irs.gov/applicable-federal-rates

short term is 3 years or less, mid term 9 years or less, long term over 9 years.

Short term is what we would be doing and the current rate is 0.44%. Guess I’ll have to play being a lender charging interest to avoid the imputed interest.

[jfoxcpacfp]

Very helpful. So looking up the IRS:

https://www.irs.gov/applicable-federal-rates

short term is 3 years or less, mid term 9 years or less, long term over 9 years.

Short term is what we would be doing and the current rate is 0.44%. Guess I’ll have to play being a lender charging interest to avoid the imputed interest.

As you can see, rates right now are so low that it won’t make much difference, but better to do it right from the get-go. Plus, if you’re ever audited and can demonstrate that you made an effort to do the right thing in an area that so many taxpayers don’t, you have a better chance of improving your good karma score (at least, in my experience).

[blephptosisbrow]

How did you come up with the purchase price?

The purchase price was calculated based on revenue over 2021 timeline. EBITDA multiplier which was similar to 0.6x our yearly collections. Independent evaluation by MBA in our area.