One of the first steps in properly planning the sale of your practice is to secure the benefit of receiving the sales proceeds tax-free.
You want to make sure that the sale of the shares qualifies for the Lifetime Capital Gains Exemption (LCGE).
The LCGE for 2020 is $883,384 for each shareholder. If you sell your shares for$1.8 million, the approximate income tax on the sales proceeds would be about $450,000. However, you can shelter the tax liability by allocating the LCGE to your spouse or to your children if they own shares directly or the shares are held by a family trust.
Advance planning is mandatory to make sure that all of the anticipated sales proceeds are sheltered by the LCGE.
Specifically, in order to claim the LCGE, your Dental Corporation has to meet the following three conditions:
- At the time of sale, 90% of the fair market value of the corporate assets must be used in an active business.
- During the 24 months prior to the sale, 50% of the fair market value of the corporate assets must have been used in the active business.
- You must have owned the shares 24 months prior to the sale.
In order to meet the above tests you may have to go through a purification process to make sure that your corporation meets the active business requirement.
Purification is a term used by us accountants to clean up the balance sheet of a dental corporation, so that you can sell the shares of the practice without paying any taxes. Basically, you can only have dental assets, including patient charts, leaseholds, equipment, and clinic real estate in the corporation. Non-practice assets, including portfolio investments and rental properties owned by the dental corporation must be removed.
What purification does is transfer any non-practice assets such as excess cash, rental properties investment portfolios etc. to a holding company. With the right tax plan, you can move these assets out without paying any taxes.
You cannot wait to implement the purification until just before the sale of your practice. Consider the holding period test that requires more than 50% of the fair value of the Dental Corporation’s assets to be used principally in an active business during all of the 24 months prior to the sale date. It means that the purification must be done more than two years before the practice sale.
When you are planning to sell your practice in the future, make sure your corporation qualifies for the exemption. We have “purified“ many dental corporations, and our clients have appreciated our painless and cost-effective way to implement it.