7 Questions to Ask Before Buying a New Medical Practice
Before you buy a medical practice, ask these 7 tax-related questions to avoid costly surprises. Learn what to check on liabilities, structure, and more.
Buying an existing medical practice can be a smart move, but it comes with hidden tax risks. If you skip the right questions, you could inherit unpaid taxes, lose depreciation benefits, or face a surprise audit. Here are 7 questions to ask before you sign, with concrete steps you can take this week.
1. What Is the Practice’s Tax History?
Ask for the last three years of federal and state tax returns, plus any IRS or state notices. Look for red flags like late filings, penalties, or ongoing disputes. A practice with a clean history is worth more than one with unresolved issues.
Action step: Request a tax clearance letter from the IRS (Form 4506-T) and your state revenue department. This confirms no outstanding balances. Do this before you make an offer.
2. Are There Any Unpaid Payroll Taxes?
Payroll taxes are a common trap. If the seller withheld employee taxes but didn’t pay them, the IRS can hold you personally liable as a new owner. This is one of the most expensive mistakes you can make.
Action step: Ask for payroll tax records for the last 12 months. Verify that all deposits were made on time. If you see gaps, walk away or adjust your price.
3. What Is the Practice’s Legal Structure?
Is it an LLC, S-corp, or C-corp? Each has different tax implications. For example, buying an S-corp can give you pass-through income, but you may inherit built-in gains tax issues. A C-corp might have double taxation on future dividends.
Action step: Have your accountant review the entity structure and its tax classification. Ask if the seller is willing to convert to a different structure before the sale, if that benefits you.
4. How Will the Purchase Price Be Allocated?
How you allocate the purchase price among assets (equipment, goodwill, patient lists, non-compete) affects your depreciation and amortization deductions. Goodwill is amortized over 15 years, while equipment can be depreciated faster. A smart allocation can save you thousands in taxes.
Action step: Work with a tax advisor to propose an allocation that maximizes your deductions. The IRS requires you and the seller to agree on Form 8594, so negotiate this early.
5. Are There Any Tax Liens or Judgments?
Liens from unpaid taxes, lawsuits, or vendor debts can attach to the practice’s assets. If you buy the practice as an asset purchase, you might not inherit them, but they can delay the sale or reduce the value.
Action step: Run a lien search on the practice’s name and the seller’s name. Your title company or attorney can do this. Also check the UCC filings for secured debts.
6. What Is the State and Local Tax Situation?
State income tax, sales tax on services, and local business taxes vary widely. Some states have no income tax, while others have high rates. Also, check if the practice has nexus in other states due to telehealth or remote staff.
Action step: Ask for the practice’s state tax registrations and recent filings. If the practice operates in multiple states, have your accountant assess your new multi-state filing obligations.
7. What Tax Credits or Incentives Are Available?
You might qualify for tax credits after the purchase, such as the Work Opportunity Tax Credit for hiring certain employees, or energy efficiency credits for upgrading equipment. These can reduce your tax bill in the first few years.
Action step: Research federal and state credits for medical practices. Your CPA can help you identify which ones apply to your situation. Also, consider if the practice qualifies for the Qualified Business Income deduction (199A), which can lower your effective tax rate.
FAQ
Q: Should I buy the practice’s assets or its stock?
Asset purchases are usually better for tax purposes because you get a step-up in basis, allowing higher depreciation. Stock purchases are simpler but you inherit all tax liabilities. Most buyers prefer assets.
Q: Can I negotiate the purchase price allocation after closing?
No, you must file Form 8594 with your tax return in the year of sale. Both parties must agree on the allocation. Negotiate it before closing to avoid disputes.
Q: What if the seller has unpaid payroll taxes?
You can be held personally liable if you have control over the practice’s finances. Do not close until the seller provides proof of payment. If they can’t, reduce your offer or require escrow for the tax amount.
Q: How long does it take to get a tax clearance letter?
The IRS typically processes Form 4506-T within 30 days. State clearance can take 2 to 6 weeks. Start this process early in your due diligence.
Related guides
- 7 Mistakes New Medical Practices Make in Their First Year
- 7 Things to Know Before You Start a New Medical Practice
- Best New Medical Practice Tools Compared in 2026
The bottom line
Buying a medical practice is a major investment, and tax issues can make or break the deal. Ask these 7 questions before you sign, and work with a CPA who specializes in medical practices. A few weeks of due diligence now can save you tens of thousands in unexpected taxes later. Start with the tax history and payroll records, then move to structure and allocation. Your future self will thank you.