Friday, May 24, 2013

Thinking about Buying a Dental Practice in 2013?

In case you haven’t heard, there were some significant income tax law changes effective January 1, 2013 and for the most part, income taxes went up. Why is this important for buyers?

You see, some folks who place prices on practices will use the profit and loss reports from the most recent year. Now sometimes this isn't an issue if the practice has been fairly consistent with revenue and expenses, however, sometimes it is an issue and this year, 2013, I’m betting you might see some over-priced practices if the person generating the price is ONLY using 2012 financials.

As Certified Public Accountants (CPA) specializing in dental accounting, which means we work with a lot of dentists and their practices for CPA services like bookkeeping, accounting, tax planning, tax preparation, business management advice, etc... and 2012 was a pretty unique year.

As part of the planning process for our ongoing CPA service clients, we have to consider what the income tax rules are in the current year, the following year and sometimes even a couple years ahead as best we can. So in 2012 we had to consider that some of our clients might have the ability to pay tax on their income on tax rates that would be lower than the tax rates they might be in for 2013. In addition, some of our clients have certain types of income that might be subject to additional taxes in 2013 compared to 2012. Why should this impact a practice?

Well consider that the main source of taxable income for most of our dental clients is their practices and with some, the real estate where their practices are located. Also consider that most actually have the ability to “control” what their taxable income will be for a particular year by deferring income and accelerating expenses OR accelerating income and deferring expenses. The most common income tax strategy is to defer income and accelerate expenses, putting off the tax hit as long as possible. However, as I noted above, 2013 was one of those unique years where many were actually doing the opposite, accelerating income and deferring expenses, or,  said an easier way, taking as much income as possible in 2012 at potentially lower income tax rates compared to allowing the income to get taxed at higher rates in 2013.

So why should buyers care? If the person generating the asking price is ONLY using 2012 as their basis for practice performance, the practice income for 2012 could be substantially inflated and therefore, the practice purchase price could be substantially inflated.

Therefore, if you’re in the market to buy a dental practice in 2013 make sure you do your homework on the purchase price so you’re not paying an inflated price based on inflated practice profits.

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