If you’re a dentist and looking to sell your practice, you basically have one of two options: sell assets or sell shares. This is the first of a series of blogs about selling your dentistry professional corporation. After I’m done with this series of blogs, I’ll discuss selling the assets. So let’s get started, shall we?
Lifetime Capital Gains Exemption
It’s all about paying little or no taxes by using the lifetime capital gains exemption. What is this exemption all about? Why is it so important? What does the “lifetime” mean? Well, every human being in their lifetime gets to pay no capital gains tax on certain items they sell up to a certain amount. Well, this leads us to ask even more questions: What is capital gains tax? What are those items? What is the maximum amount we can claim?
Capital Gains Tax
This is the tax that you would pay based on selling certain types of property. For simplicity’s sake, the capital property will be the shares of your dentistry professional corporation. When you originally were issued the shares from the corporation, you gave something in exchange to the corporation that was worth the value of the shares you received. If the corporation was worthless and had no assets or income, then you would have received the shares for $1 or something minimal. Now, if you transferred your dental practice to your corporation and in exchange received shares, then there would have been a value assigned to the shares that you paid for (typically, the fair market value of the assets you transferred over). Whatever you paid in order to get your shares is called the Adjusted Cost Base.
Now, when you go to sell those same shares, assuming they have increased in value from the time that you acquired them, then you will receive proceeds that result in a capital gain. Typically, you would have to pay tax on the capital gain. That tax is equal to 1/2 of the gain multiplied by your full marginal tax rate.
Here’s an example: if you paid $1,000 for your shares and then you later sold them for $10,000, then there will be a capital gain of $9,000 – half of which is taxable (i.e. must be included in your taxable income) at your full tax rate. Ouch! If your marginal tax rate on that additional $4,500 were 40%, then you’d have to pay about $1800 in taxes! Ouch!
Thankfully, there’s a way to avoid paying that tax. It’s called the Lifetime Capital Gains exemption on the sale of shares of a small business corporation. If you qualify for it, you can avoid paying up to $750,000 of capital gains and you can even multiply that exemption by using your family members to own shares of your dentistry professional corporation. This will all be talked about in the next series of blogs.