BLOG: Introduction to taxation of sale proceeds: C corporation
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The taxation of proceeds from a sale of a medical practice depends on, among other things, whether the entity that owns the practice is a C corporation, an S corporation or a partnership.
In addition, it depends on whether the deal is structured as a sale by the entity of its assets or as a sale of the entity by its physician owners.
Source: Adobe Stock.
In this post, we provide a high-level summary of the U.S. federal income taxation of sale proceeds if a target practice is classified for U.S. tax purposes as a C corporation. Future posts will consider the treatment of an S corporation and of a partnership. Each post will compare a sale of assets and a sale of equity. State and local tax consequences (not discussed in our posts) must also be taken into account, which add nuances that need to be fully considered on a case-by-case basis.
Of course, a target practice may be structured to include more than one entity. For example, the general practice may be owned by a corporation and a surgery center may be owned by a partnership. In that case, deal structuring considerations and taxation of sale proceeds may vary within the same deal. The tax consequences of a sale of a medical practice are complex, and it is important to consult with your tax adviser early on in the sale process.
Below we compare a sale of stock of a C corporation and a sale of assets by a C corporation.
Stock sale: Each shareholder generally will recognize gain or loss equal to the difference between the portion of the purchase price received and the tax basis in such shareholder’s stock. Such gain or loss generally will be long-term capital gain or loss to the extent the selling shareholder held the stock for more than 1 year. Long-term capital gain recognized by an individual currently is subject to U.S. federal income tax at a maximum rate of 20%, and short-term capital gain currently is taxed at a maximum rate of 37%. In addition, a 3.8% net investment income tax applies.
Asset sale: The C corporation generally will recognize gain or loss with respect to each asset equal to the difference between the amount of the purchase price allocated to such asset and the tax basis of such asset. Such gain or loss will be capital or ordinary depending on the type of asset. However, a C corporation is subject to the same U.S. federal corporate tax rate on capital gain and ordinary income, currently 21%.
The selling C corporation generally will liquidate after the asset sale, distributing the sale proceeds to its shareholders, which results in a second level of tax to such shareholders. The gain or loss recognized by the shareholders upon liquidation generally is taxed in the same manner as described above under “stock sale.”
Observations: A buyer generally prefers to purchase assets and not stock so that the tax basis in the purchased assets is increased (“stepped up”) to the amount of the purchase price. A buyer realizes significant tax benefits from depreciation or amortization of the stepped-up tax basis in purchased assets, which is not available in a stock sale. The purchase price for assets may be higher than the purchase price for the stock to account for the buyer’s tax benefits from depreciation and amortization. However, such additional purchase price would never make up for the double tax incurred by the C corporation and its shareholders, and thus, an asset sale is generally not economically preferred by sellers when a C corporation is the target.
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