New Medical Practice Buyer's Guide: What to Look For
A practical guide for new medical practice owners on what to evaluate when buying a practice, with a focus on tax implications, including entity structure, asset allocation, and hidden liabilities.
Buying an existing medical practice can be a smart move, but it comes with tax traps that can cost you thousands if you overlook them. This guide walks you through the key tax-related factors to examine before you sign, with realistic figures and actionable steps.
Entity Structure and Tax Implications
The way the practice is structured affects your tax liability and future flexibility. Common structures include:
- Sole proprietorship: Simple, but you pay self-employment tax on all profits (15.3% in 2026).
- Partnership: Pass-through taxation, but you may inherit partnership tax liabilities.
- S-Corp: Pass-through with salary requirements; you must pay yourself a reasonable salary (typically $120,000-$200,000 for a physician in 2026).
- C-Corp: Double taxation on dividends, but allows for fringe benefits.
What to do: Review the seller’s current structure. If it’s a C-Corp, you may want to convert to an S-Corp after purchase, but that triggers a taxable event. Consult a CPA before closing.
Asset Allocation: The Purchase Price Breakdown
The purchase price must be allocated among assets like equipment, goodwill, patient lists, and a non-compete agreement. This allocation matters because each asset has a different tax treatment:
- Equipment and furniture: Depreciated over 5-7 years (MACRS).
- Goodwill and patient lists: Amortized over 15 years (Section 197).
- Non-compete agreement: Amortized over 15 years.
- Real estate: Depreciated over 27.5 years (if you buy the building).
What to do: Negotiate the allocation in the purchase agreement. A higher allocation to equipment (which depreciates faster) gives you quicker tax deductions. For example, if you allocate $100,000 to equipment instead of goodwill, you can deduct $20,000 per year instead of $6,667.
Hidden Tax Liabilities: What to Check
Before buying, you need to uncover any unpaid taxes or liens. If you buy the practice’s assets (not stock), you generally avoid the seller’s tax debts. However, if you buy the entity (stock), you inherit all liabilities, including back taxes.
Key checks:
- Obtain a tax clearance certificate from the IRS and state tax authority.
- Review the last 3 years of tax returns for red flags like underreported income.
- Check for payroll tax liabilities, which can be personal liabilities for responsible parties.
What to do: Have your accountant run a lien search. If you find unpaid taxes, either require the seller to pay them before closing or reduce the purchase price.
Tax Credits and Deductions for New Owners
As a new owner, you may qualify for tax breaks that the seller didn’t use:
- Section 179 deduction: Deduct up to $1,160,000 (2026 limit) for new or used equipment in the year of purchase.
- Bonus depreciation: 80% bonus depreciation on new equipment in 2026.
- Qualified Business Income (QBI) deduction: Up to 20% of your qualified business income, subject to income limits.
What to do: Plan your equipment purchases for the first year to maximize these deductions. For example, if you buy $200,000 in equipment, you can deduct the full amount under Section 179, reducing your taxable income significantly.
Comparison of Purchase Structures
| Structure | Tax Treatment | Risk of Inheriting Liabilities | Best For |
|---|---|---|---|
| Asset purchase | Depreciation and amortization; no liability transfer | Low | Most new owners |
| Stock purchase | Carryover basis; potential liability transfer | High | If you want to keep contracts and licenses |
| Merger | Complex; tax-free reorganizations possible | Medium | Larger practices |
| Lease with option to buy | Rent deduction; no depreciation until purchase | Low | If you’re unsure about the practice |
Practical Steps for This Week
- Get a CPA with healthcare experience: Ask for referrals from other practice owners. Expect to pay $200-$400 per hour for tax planning.
- Request the seller’s tax returns: Review the last 3 years of federal and state returns. Look for inconsistencies.
- Run a lien search: Use the IRS Form 8821 to authorize your CPA to access the seller’s tax records.
- Draft a letter of intent: Include a clause that the purchase price is contingent on a clean tax clearance.
FAQ
Q: Can I deduct the cost of buying a practice? A: You can’t deduct the purchase price as a business expense, but you can depreciate or amortize the assets over time. For example, equipment is depreciated over 5-7 years, and goodwill over 15 years.
Q: What happens if the seller has unpaid payroll taxes? A: If you buy the assets, you’re generally not liable. But if you buy the stock, you could be responsible. Always get a tax clearance certificate before closing.
Q: Should I buy the practice’s assets or stock? A: For most new owners, an asset purchase is safer because you avoid inheriting liabilities. Stock purchases are only advisable if you want to keep the seller’s contracts, licenses, or favorable leases.
Q: How does the QBI deduction work for a medical practice? A: You can deduct up to 20% of your qualified business income, but it’s phased out if your taxable income exceeds $382,500 (single) or $765,000 (married filing jointly) in 2026. Most practice owners qualify, but it depends on your total income.
The Bottom Line
Buying a medical practice is a major investment, and tax mistakes can be costly. Focus on the entity structure, asset allocation, and hidden liabilities. Work with a CPA who knows healthcare, and negotiate the purchase agreement with tax implications in mind. Take the steps above this week to protect your financial future.