17 January 2023
by Laurie Abramowitz , William J. Needle , Reuven Graber and Christine Klimanskis
Arnold & Porter
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The taxation of proceeds from a sale of a medical practicedepends on, among other things, whether the entity that owns thepractice is a C corporation, an S corporation or a partnership.
In addition, it depends on whether the deal is structured as asale by the entity of its assets or as a sale of the entity by itsphysician owners.
In this post, we provide a high-level summary of the U.S.federal income taxation of sale proceeds if a target practice isclassified for U.S. tax purposes as a C corporation. Future postswill consider the treatment of an S corporation and of apartnership. Each post will compare a sale of assets and a sale ofequity. State and local tax consequences (not discussed in ourposts) must also be taken into account, which add nuances that needto be fully considered on a case-by-case basis.
Of course, a target practice may be structured to include morethan one entity. For example, the general practice may be owned bya corporation and a surgery center may be owned by a partnership.In that case, deal structuring considerations and taxation of saleproceeds may vary within the same deal. The tax consequences of asale of a medical practice are complex, and it is important toconsult with your tax adviser early on in the sale process.
Below we compare a sale of stock of a C corporation and a saleof assets by a C corporation.
Stock sale: Each shareholder generally will recognize gain orloss equal to the difference between the portion of the purchaseprice received and the tax basis in such shareholder's stock.Such gain or loss generally will be long-term capital gain or lossto the extent the selling shareholder held the stock for more than1 year. Long-term capital gain recognized by an individualcurrently is subject to U.S. federal income tax at a maximum rateof 20%, and short-term capital gain currently is taxed at a maximumrate of 37%. In addition, a 3.8% net investment income taxapplies.
Asset sale: The C corporation generally will recognize gain orloss with respect to each asset equal to the difference between theamount of the purchase price allocated to such asset and the taxbasis of such asset. Such gain or loss will be capital or ordinarydepending on the type of asset. However, a C corporation is subjectto the same U.S. federal corporate tax rate on capital gain andordinary income, currently 21%.
The selling C corporation generally will liquidate after theasset sale, distributing the sale proceeds to its shareholders,which results in a second level of tax to such shareholders. Thegain or loss recognized by the shareholders upon liquidationgenerally is taxed in the same manner as described above under"stock sale."
Observations: A buyer generally prefers to purchase assets andnot stock so that the tax basis in the purchased assets isincreased ("stepped up") to the amount of the purchaseprice. A buyer realizes significant tax benefits from depreciationor amortization of the stepped-up tax basis in purchased assets,which is not available in a stock sale. The purchase price forassets may be higher than the purchase price for the stock toaccount for the buyer's tax benefits from depreciation andamortization. However, such additional purchase price would nevermake up for the double tax incurred by the C corporation and itsshareholders, and thus, an asset sale is generally not economicallypreferred by sellers when a C corporation is the target.
Originally Published by Healio
The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.
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