Dentists Have New Obligations and Limitations Regarding Third-Party Financing Under Recently Passed Illinois Law

Few decisions a dental practice owner makes are as impactful as who they hire as an associate dentist. Whether a freshly minted dental school graduate or a more seasoned lateral hire, the associate you bring on board will hold the well-being of your patients, as well as the reputation, culture, and financial trajectory of your practice, in their hands. Making an informed decision, and conducting the due diligence necessary to do so, is critical and will go a long way towards fostering a mutually productive professional relationship. There is a multitude of considerations that go into the associate dentist hiring decision matrix – technical expertise, skill sets that match your needs, demeanor and communication skills, cultural fit, and agreed compensation structure, among others. But all of these factors, as important as they are, are irrelevant if the candidate lacks the fundamental ability to practice dentistry in your state or has issues of concern in their record that cast doubt on their suitability for your practice. If you have a seemingly ideal associate dentist candidate in your sights and are ready to move forward with an offer, make sure you cover all of the following fundamental licensing, credentialing, and disciplinary bases before doing so. Verify Licensure In Your Jurisdiction: Confirm the associate holds a valid dental license in your state or is in the process of obtaining their license. Obtain a photocopy or digital copy of the state dental license and verify the license status and validity using your state dental board’s online system. Check Educational Background: Request transcripts or diplomas from accredited dental schools. Specializations: If the candidate claims additional certifications, specialization, or training, ensure they provide supporting documentation. DEA Certification: Ensure the new associate has a valid DEA certificate. Get a copy of the certificate and confirm the registration number and expiration date. Malpractice History: Inquire about past claims or lawsuits. Ask about the underlying allegations and how the matters were resolved. Malpractice Insurance: If the associate will be responsible for maintaining their own malpractice insurance coverage, obtain proof of their current coverage, and verify policy limits, policy number, the insurance provider’s contact information, and the policy renewal dates. Assess Clinical Skills and Competence: Ask the candidate to present cases they’ve handled, including treatment plans and outcomes, and consider having candidates perform a procedure or shadow your team to observe their techniques and patient interaction. Peer Recommendations: Speak to previous employers, mentors, or colleagues about the candidate’s skills and areas for improvement. Conduct a Thorough Background Check: Ensure the candidate has no criminal history or legal issues beyond malpractice claims that could jeopardize patient safety, their licensure status, or your practice's reputation. Employment History and Contractual Obligations: Verify the candidate’s employment history and inquire about their reasons for leaving previous positions. Also ask about any contractual restrictions on their ability to join your practice, such as non-competition or non-solicitation agreements. Understanding of Ethics and Compliance Obligations: Inquire as to their knowledge and appreciation of and commitment to fundamental ethical and legal compliance obligations. We Focus on You So You Can Focus on Your Patients As noted, the hiring and onboarding of a new associate dentist is a multifaceted, multistep endeavor. No matter how impressive a putative associate may seem and perhaps is, confirming that they possess the foundational requirements and attributes needed to contribute to your practice and care for your patients is indispensable. At Grogan Hesse & Uditsky, P.C., we focus a substantial part of our practice on providing exceptional legal services for dentists and dental practices, as well as orthodontists, periodontists, endodontists, pediatric dentists, and oral surgeons. We bring unique insights and deep commitment to protecting the interests of dental professionals and their practices and welcome the opportunity to work with you. Please call us at (630) 833-5533 or contact us online to arrange for your free initial consultation. Jordan Uditsky, an accomplished businessman and seasoned attorney, combines his experience as a legal counselor and successful entrepreneur to advise dentists and other business owners in the Chicago area. Jordan grew up in a dental family, with his father, grandfather, and sister each owning their own dental practices. This blend of legal, business, and personal experience provides Jordan with unique insight into his clients’ needs, concerns, and goals.

There are many reasons why a dentist may want to sell their practice - retirement, relocation, a desire to step back from the responsibilities of ownership, or an offer too good to refuse. Whatever the motivation, one goal is always the same: maximizing the financial benefits of the transaction. Those benefits – today and far into the future - depend on many factors, but few have as much impact as how the Internal Revenue Service treats the gains you realize from the sale of your practice. How you structure the sale, the nature of the entity you’re selling, the specific assets involved in the sale, and any special considerations like earnouts or deferred payments will determine how much winds up in your pocket vs. how much you’ll be sending to Uncle Sam. Here are some fundamental tax considerations to understand if you are looking to sell your dental practice in 2025: What Type of Entity Are You Selling? As noted in the title of this post, how you structure the sale of your practice is as important as the nature and value of the practice you’re selling. However, the entity structure you chose when you formed your practice still has a significant impact on how you’ll be taxed when you walk away. If you organized your practice as a C corporation, all proceeds from the sale of the corporation’s assets will be taxed on the corporate level. This means these proceeds may be taxed twice: once at the corporate level and again when you distribute those monies to yourself. If, however, your practice is a regular partnership (such as a limited liability company or a limited liability partnership) or an S Corporation, you may pay tax on both ordinary and/or capital gains income on your personal income tax return, depending on the structure of the sale. Capital Gains v. Ordinary Income If you make a profit when you sell an asset, you make a capital gain. But not all such gains are subject to capital gains tax. Sometimes, the IRS taxes profits as ordinary income at the taxpayer’s individual rate. Since the current individual rate is around 37 percent, sellers would rather pay the currently lower capital gains rate (the maximum of which is 20%) to the extent possible. Notably, the capital gains tax only applies to profits on assets held for more than 12 months. Unless a dental practice goes from zero to 60 or acquisition to sale in less than a year, which is rarely the case, the sale will implicate the capital gains tax. Accordingly, structuring your deal to maximize the amounts taxed as capital gains vs. ordinary income is one of the most significant considerations in minimizing your tax liabilities. This depends, to a large degree, on how you allocate and treat the assets you are selling. Asset Allocation Most sales of dental practices are structured as asset sales, meaning the purchaser is acquiring specific assets of the practice rather than its stock. Dental practices are comprised of several different kinds of assets—equipment, supplies, real property, goodwill—and separate accounting and tax rules apply to each type of asset. Tangible Assets : These include equipment, furniture, office and medical supplies, and other physical assets. Typically, tangible assets are treated as depreciated property, so gains on the sale of these assets are usually subject to recapture rules, where depreciation deductions taken in prior years may be "recaptured" and taxed as ordinary income. Accounts Receivable : Any outstanding accounts receivable can be part of the sale. For cash-basis taxpayers (the most common for dental practices), accounts receivable are taxed as ordinary income since they represent payments for services already rendered but not yet received. Goodwill and Intangible Assets : The goodwill of your dental practice, which includes the value of your brand, client base, and reputation, is generally taxed at the capital gains rate. This is advantageous because the long-term capital gains rate is often lower than the ordinary income rate. Other intangible assets may also qualify for capital gains treatment, depending on how they are classified. If you have taken depreciation deductions on your practice’s equipment or real property, the IRS requires that depreciation be "recaptured" and taxed as ordinary income up to the amount of prior depreciation. While this applies to equipment and other depreciable assets, goodwill, and certain intangibles do not face depreciation recapture. Earnouts: Deferred Purchase Price Payment or Compensation? From the IRS’ perspective, how and when you receive payment for the sale of your practice will determine its tax treatment. If those payments come in the form of earnouts, the key issue is whether the IRS views each payment as a deferred purchase price payment or the payment of compensation. Earnout provisions are often included in practice sale agreements and provide for contingent additional payments from the buyer to the seller upon the practice meeting specified financial targets or other milestones in the future. Earnout payments are generally treated as part of a deferred purchase price so long as the seller is not performing services for the buyer and the practice after the consummation of the sale. The earnout payments may be treated as compensation income if the seller provides services for the buyer or target company after the acquisition or, in some cases, if the purchase agreement includes a non-competition provision. If the IRS treats earnout payments as deferred purchase price payments (for a non-corporate seller), they will be capital gains, which, as noted, are taxed at a much lower rate than ordinary income. However, if the IRS determines that the earnout constitutes compensation to the seller, the IRS will consider it ordinary income that can be subject to tax rates as high as 37 percent, along with employment taxes (such as Social Security and Medicare taxes). Accordingly, the sale agreement should specifically refer to earnout payments as part of the purchase price to support the treatment of such payments as capital gains rather than ordinary income. However, what you call the payments in the documentation is far from determinative, as the IRS will look beyond the language of the agreement to consider several substantive factors when deciding how earnout payments should be classified. This is where careful structuring and documentation can play an outcome-determinative role in how these substantial sums will be treated for tax purposes. You put a lot into your dental practice over the years. How much you take out and whether your sale will reap the benefits you anticipate depends on how well your professional team of attorneys, accounting professionals, and financial advisors do their jobs when crafting your transaction. That is one of many reasons why you should consult with an experienced dental practice sale and acquisition attorney to discuss and understand your options. We Focus on You So You Can Focus on Your Patients At Grogan Hesse & Uditsky, P.C., we focus a substantial part of our practice on providing exceptional legal services for dentists and dental practices, as well as orthodontists, periodontists, endodontists, pediatric dentists, and oral surgeons. We bring unique insights and deep commitment to protecting the interests of dental professionals and their practices and welcome the opportunity to work with you. Please call us at (630) 833-5533 or contact us online to arrange for your free initial consultation. Jordan Uditsky, an accomplished businessman and seasoned attorney, combines his experience as a legal counselor and successful entrepreneur to advise dentists and other business owners in the Chicago area. Jordan grew up in a dental family, with his father, grandfather, and sister each owning their own dental practices. This blend of legal, business, and personal experience provides Jordan with unique insight into his clients’ needs, concerns, and goals.