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Deducting Practice Buy-In

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  • Donnie
    replied
    My point was only that you can make elections on the purchase of membership interests in an LLC that could have tax advantages.  I did miss the W-2 piece, so agree it is a moot point if the person will still be an employee rather than a partner.

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  • jfoxcpacfp
    replied




    Thank you @jfoxcpacfp. It sounds like another option will be to pay for the buy-in from his provider account with the group. Since I believe that would be pre-tax, it sounds like by far the preferable option. We had an attorney review the contract, but I think he was primarily looking at the language in the contract, as opposed to the tax implications of the buy-in itself.
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    I would have to know more about the specifics, i.e. status of corp and what you mean re "buy-in from his provider account with the group". Would the purchase price reduce his share of the profits over a period of time? (Even so, it should still be taxable to him because he is purchasing something of value with his share of the profits.)

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  • jfoxcpacfp
    replied



    Jfox, what was confusing?  The LLC will have tax deductions that the buyer will get the credit for and will show up on buyer’s K-1, including depreciation and amortization.  It’s possible to make a 754 election at the time of purchase to allow a step up in basis that could allocate value to goodwill.  Goodwill can be deducted over 15 years.



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    I don't think your response had anything to do with the original question. Any passthroughs will not be affected by the buy-in basis unless, of course, he has no basis left from a purchase of s-corp stock and negative passthroughs. If a C-corp, basis is purely determined according to my Apple stock example.

    He will not be a partner. The OP stated that the spouse would be paid on a W2.

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  • Donnie
    replied

    Jfox, what was confusing?  The LLC will have tax deductions that the buyer will get the credit for and will show up on buyer's K-1, including depreciation and amortization.  It's possible to make a 754 election at the time of purchase to allow a step up in basis that could allocate value to goodwill.  Goodwill can be deducted over 15 years.

    Leave a comment:


  • STM
    replied
    Thank you @jfoxcpacfp. It sounds like another option will be to pay for the buy-in from his provider account with the group. Since I believe that would be pre-tax, it sounds like by far the preferable option. We had an attorney review the contract, but I think he was primarily looking at the language in the contract, as opposed to the tax implications of the buy-in itself.

    Leave a comment:


  • jfoxcpacfp
    replied




    You should be able to deduct goodwill amortization and the depreciation of any assets assuming it is an LLC. That would be over a number of years though.
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    Huh?

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  • Donnie
    replied
    You should be able to deduct goodwill amortization and the depreciation of any assets assuming it is an LLC. That would be over a number of years though.

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  • Craigy
    replied
    Yeah usually a buy-in is not an expense, but something you purchase and hold.  You should discuss with your CPA all of the details.

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  • jfoxcpacfp
    replied




    My spouse is becoming a partner at his group, which means we’ll be writing a large check to buy-in within the next month. Is there any way we can deduct this as a business expense, or anything else, on our taxes? Not sure if it’s relevant, but he’ll still get a W2 once he’s a partner.
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    You won't get a deduction for the buy-in. Your husband is purchasing a percentage of the practice and the cost will be classified as his "basis" (or cost) in the share(s) he owns. Consider it similar to buying a share of Apple stock. Your basis is what you pay for the stock, which represents a percentage of ownership in the company. When you sell the stock, you have a gain or loss on what you receive in excess (or the deficit) or what you paid.

    So, for your husband, the purchase price will be deducted from any proceeds you receive in the future when he leaves the practice, retires, or dies. If he dies and you inherit the stock, your basis will "step up" to the date of death fair market value for purposes of determining gain or loss when you sell it back to the other shareholders, which is usually the selling price, so no gain or loss.

    If your husband has to borrow money to buy the stock, any interest on the loan is classified by the IRS as "investment interest" and can be deducted only as an offset to "investment income".

    Probably a lot more than you wanted to hear   . I strongly recommend getting a review of the contract and Shareholders' Agreement by a qualified professional (attorney, CPA, and/or CFP) before buying in. I can think of many questions that you should know the answers to before writing a large check to buy into a practice.

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  • STM
    started a topic Deducting Practice Buy-In

    Deducting Practice Buy-In

    My spouse is becoming a partner at his group, which means we'll be writing a large check to buy-in within the next month. Is there any way we can deduct this as a business expense, or anything else, on our taxes? Not sure if it's relevant, but he'll still get a W2 once he's a partner.
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