Lately we’ve been getting lots of questions from chiropractors wondering how President Biden’s proposed tax legislation will affect your chiropractic practice sale.  The quick easy answer is YES, taxes will impact your sale – they always do.  But here’s the scoop on how the proposed changes could impact your future sale or transition.

Although the bill has not yet been passed (and there are experts debating whether it will be passed), the House Ways and Means Committee approved proposed tax increases on September 15, 2021.  The increase in taxes are designed to fund a portion of the $3.5 trillion “Build Back Better Act” that Congress is currently considering.

While most of the tax changes are targeted at those with incomes of $400,000 or more, many experts are warning that these changes could have negative impact on your income and the economy.  The proposed tax legislation will affect your chiropractic practice sale – if passed – so here are a few of the changes you need to know about:

Individual Taxes

  • Increase in Income Tax Rate – The top income tax rate would increase from 37% to 39.6% on regular income for chiropractors with annual income greater than $400,000 (single) or $450,000 (married). This would start in 2022.

 

  • Capital Gains and Dividend Tax Rates Increase – The maximum capital gains and dividend tax rate would be increased from 20% to 25% for taxpayers whose income exceeds $400,000 (single) and $450,000 (married). This applies to capital gains and dividends generated on or after September 13, 2021 — which would include proceeds from your practice sale if you sold after this date.

Business Tax Provisions

  • Corporate tax rate changes – If your chiropractic practice is registered as a “C” corporation, the flat federal income rate of 21% will change to a tiered structure starting at 18% (for taxable corporate income up to $400k), then 21% (400k-$5Million) and then 26.5% for over $5Million annually.

 

  • Personal Service Corporations Tax – All taxable income for personal service corporations would be taxed at the highest rate of 26.5%

 

  • S Corporation, LLC and Limited Partnerships Will Pay Medicare Payroll Tax  — Under the current tax legislation, if you are a chiropractor organized as a Subchapter S corp, you do not pay the 3.8% Medicare payroll tax on profits after reasonable compensation has been paid. With the new proposed legislation, taxpayers whose adjusted gross income (AGI) exceeds $400,000 (single) or $500,000 (married filing jointly) would pay the 3.8% tax on S corporation profits. This same tax structure would also apply to LLC and limited partnership profits. These proposed changes would also start in 2022.

EVEN MORE Changes Proposed

The changes noted above are just the tip of the iceberg.  There are proposed changes to retirement plans and IRA inside the proposed legislation, as well as estate planning tax changes and more.  Also inside the proposed bill is an $80 Billio (yes BILLION) increase given to the IRS in order to increase audits and recoup revenues from you, the taxpayer.

Certainly, there are more changes and more details that could be discussed here. But since we’re not CPAs or tax attorneys, my purpose in writing is not to give you an exhaustive detail on every change but rather to highlight a few details on how this proposed tax legislation will affect your chiropractic practice sale – and ultimately your income.

 

Why Tax Legislation May Impact Your Chiropractic Practice Sale

Taxes affect every chiropractic practice sale – even if these proposed changes do not take place.  But if your tax basis increases, then you certainly want to know when that would happen and what can be done – in advance.

Typically, most chiropractic practices are sold as an Asset Sale whereby your tax basis is divided up into two basic categories:  Goodwill (taxed as Capital Gain) and Equipment (Taxed as Ordinary Income = your regular tax bracket).  In many cases, chiropractors would prefer the capital gains tax rate as that is generally lower than ordinary income.  While it’s nearly impossible to be taxed as all capital gains and no ordinary income during your sale, smart tax planning starts with appropriately allocating the different components of your sale.  Done well, just this strategy alone can save on your tax bill after you sell.

So when a tax bill comes along that proposes to change the tax structure, in the most basic sense, it will make it more difficult to employ tax strategies and increase the chances that you are going to pay more in taxes when you sell – and take home less of your sale proceeds.  In a nutshell, that’s why it’s important that you keep abreast of how any proposed tax legislation will affect your chiropractic practice sale.

WHAT TO DO NEXT

  1. Talk With Your Tax Advisor – if you are considering a chiropractic practice sale in the near future, this may be a good time to speak with your tax advisor. Since most of these changes would go into effect in 2022 (if passed), planning ahead can only help you attempt to achieve tax savings by smart timing of your sale.

 

  1. If You Are Close, Consider Selling Sooner – if you are getting close to retirement or on the fence of whether to sell now or later, you might want to consider selling sooner BEFORE this tax legislation were to pass, in order to allow you the best chances of avoiding these changes.

 

  1. Get Your Chiropractic Practice Valuation NOW – for many chiropractors, they are unsure of how much their chiropractic practice is even worth. So they do not even know how much or if proposed tax legislation like this would impact their practice sale.  One thing is for sure, when you sell, it will trigger a taxable event.  You may think you’re not a “high income” earner of over $400k, but if you sell your chiropractic practice and/or your building in addition to your regular income, you may suddenly find yourself in that position.  With smart tax planning and by knowing what your practice is worth, you may be able to avoid some tax consequences – but that usually requires you to know what to expect before the sale day arrives!

 

  1. Get Expert Help to Sell AND to Save – Unfortunately, the process of selling your chiropractic practice is more complex than selling a car or a house. This is not only because of the possible tax consequences but because of many more details that most chiropractors have no knowledge of how to handle.  This is not only true in our profession, but most small businesses in general. In fact, statistics show that approximately 85% of small businesses sold without professional help will never sell – and that includes chiropractic practices. Fortunately, our sale stats are the complete opposite and we could not even eke out a living if we only sold 10-15% of the listings we attempted.  Bottom line is, selling your practice is not a DIY project for so many reasons. The good news is we’re here to help! And with expert help you can both save on the tax consequences and actually sell your chiropractic practice – a win-win!

MORE QUESTIONS – NEED MORE HELP?  Check out our FREE webinars on the topics of your chiropractic practice sale. Or shoot us an email — info [at] strategicddc.com and we’d be happy to help you take the next step!