Short answer
Most of a physician practice sale is taxed as long-term capital gain at 20 percent federal, plus state tax. But several pieces are taxed as ordinary income at up to 37 percent: payments for a non-compete, consulting or transition pay, accounts receivable, and depreciation you already took on equipment. The rollover equity you take in the buyer's company is usually not taxed at closing; that tax is deferred, not forgiven. The split between capital gain and ordinary income is set by the purchase price allocation in the deal documents, so the time to influence your tax bill is before you sign the letter of intent.
Key facts
- Federal long-term capital gain rate (2026)
- 20% for nearly every practice seller (the 15% band ends at $613,700 of taxable income for a married couple).
- Federal ordinary rate (2026)
- 37% above $768,700 married filing jointly; $640,600 single.
- Net investment income tax
- 3.8%, but often excluded on the sale itself if you materially participated in the practice. Usually applies later to the sale of rollover equity.
- What is ordinary income
- Non-compete payments, consulting or transition pay, cash-basis accounts receivable, and equipment depreciation recapture.
- Rollover equity
- Deferred under Section 721 or 351 if structured correctly. The gain comes due at the second sale.
- State tax
- California up to 13.3%, New York State up to 10.9% (plus 3.876% for NYC residents), Texas and Florida 0%. State tax on the sale is mostly non-deductible federally because the SALT cap phases down to $10,000 at high income.
- The form that decides it
- Form 8594 (purchase price allocation under Section 1060). Buyer and seller must file matching copies.
Why the headline number is not your number
When a platform offers to buy your practice for, say, 9 times EBITDA, the number on the letter of intent is the enterprise value. It is not the check you receive, and it is not what you keep. Between that number and your bank account sit four things: the share of the price you must roll into the buyer's company, the share held back in escrow, the fees you pay to your banker, lawyer, and accountant, and the tax. This page is about the tax. The calculator puts all four together.
Tax on a practice sale is unusual because the same dollar can be taxed at 20 percent or at 37 percent depending on what the contract calls it. Nobody at the IRS decides that. The two sides of the deal decide it when they write the purchase price allocation, and the buyer often cares much less about the split than you should.
What the IRS sees when a practice is sold
The IRS does not see "a practice." It sees a bundle of separate assets, each with its own tax treatment. Under Section 1060 of the tax code, the buyer and seller must split the price across seven classes of assets on Form 8594, and both must file the same numbers. Here is what a typical physician practice looks like once it is broken apart.
| What is being sold | Form 8594 class | Your federal rate | Buyer's treatment |
|---|---|---|---|
| Goodwill of the practice | VII | Long-term capital gain, 20% | Deducted over 15 years |
| Your personal goodwill (sold by you, not the practice) | VII, on a separate agreement | Long-term capital gain, 20% | Deducted over 15 years |
| Covenant not to compete | VI | Ordinary income, up to 37% | Deducted over 15 years regardless of the covenant's term |
| Patient lists, trade name, trained workforce | VI | Capital gain in most cases | Deducted over 15 years |
| Accounts receivable (cash-basis practice) | III or V, varies | Ordinary income, up to 37% | Basis equals price paid |
| Equipment already depreciated | V | Ordinary income up to the depreciation you took (Section 1245); any excess is capital gain | New basis, 100% bonus depreciation |
| Supplies and inventory | IV | Ordinary income | Deducted as used |
| Consulting, transition, or retention pay | Not part of the sale; separate agreement | Ordinary income plus payroll tax | Deducted when paid |
Look at the buyer's column. Almost everything is deducted over 15 years whether it is called goodwill or a non-compete. That is why the buyer's tax advisors are often relaxed about the allocation. For you, moving a dollar from goodwill to the non-compete raises the federal tax on that dollar from 20 cents to 37 cents. On a $2 million covenant allocation, that is roughly $300,000 or more of additional federal tax, before state tax, for the same total price.
Two dermatologists each receive $6 million for their share of a practice. The first has $5.6 million allocated to goodwill and $400,000 to a non-compete. The second has $4.6 million to goodwill, $1 million to a non-compete, and $400,000 as a two-year "transition consulting" agreement. Both signed the same headline number. At 2026 federal rates, the second dermatologist pays roughly $170,000 more in federal income tax, plus payroll tax on the consulting fees, plus a larger state bill in a state that taxes ordinary income at a higher effective rate. Nothing about the medicine changed. Only the words in the contract did.
Is the rollover taxed at closing?
Usually not, and this is the part most physicians get right by accident. Nearly every private equity deal asks you to take 20 to 40 percent of your price as equity in the management company or its holding company rather than as cash. If the deal is structured as a contribution of your practice interest to a partnership (Section 721) or to a corporation where the contributing group ends up with 80 percent control (Section 351), the portion you roll is not taxed now.
Three things follow from that, and the third one is the one to remember.
- The cash you receive is taxed now, as described above. Only the rolled portion is deferred.
- Your tax basis carries over. If your basis in the practice was close to zero, as it is for most physicians who built a practice rather than bought one, your basis in the rollover equity is also close to zero.
- Deferred means postponed, not forgiven. When the rollover equity is sold at the "second bite," the entire value is gain, and by then it is often taxed at 23.8 percent rather than 20 because the 3.8 percent net investment income tax usually applies (more on that below).
The rollover equity page covers the waterfall, preferred returns, and what happens if you leave. For tax purposes, the key questions to ask your deal counsel are which code section the rollover relies on, whether any part of the rollover is subject to vesting (which changes the answer), and whether the holding company is a partnership or a corporation, because that determines whether you will receive K-1 income you did not get in cash.
Which entity you sell from changes the answer
Most physician practices are professional corporations taxed as S corporations, some are C corporations, and a growing number of groups are LLCs taxed as partnerships. The entity matters.
S corporation
Gain passes through to you once. The standard private equity structure for an S corporation is an F-reorganization: you form a new holding company, drop your existing corporation under it, convert the old corporation to an LLC, and sell LLC interests to the buyer. The buyer gets a stepped-up basis in the assets, you get capital gain on the cash and deferral on the rollover, and the practice keeps its tax ID and payer contracts. The F-reorganization page explains this step by step.
One trap: if your S election is less than five years old, or your S corporation still holds assets from its days as a C corporation, Section 1374 taxes the built-in gain at 21 percent at the entity level before it reaches you. Ask your CPA when the S election was made before you sign anything.
C corporation
A C corporation that sells its assets pays 21 percent corporate tax on the gain, and then you pay tax again when the cash comes out to you. The combined federal rate approaches 40 percent before state tax. Two tools reduce this: selling your personal goodwill directly, outside the corporation, and using a large final-year deduction such as a cash balance plan contribution. Both require planning before the letter of intent, not after.
Partnership or LLC
Selling a partnership interest is capital gain except for your share of "hot assets" under Section 751: cash-basis receivables and depreciation recapture are ordinary income no matter how the deal is papered.
Will I owe the 3.8 percent net investment income tax?
On the sale of the practice itself, often not. Section 1411 excludes gain from a trade or business in which you materially participate. A physician who works full time in the practice meets the 500-hour test easily. For a sale of an interest in an S corporation or partnership, the rule looks through to the underlying assets, so gain on the practice's operating assets is excluded while gain on any investment assets the entity held is not. The IRS never finalized the regulation on this point, so sellers rely on the 2013 proposed regulations, and your CPA should document the position.
On the second bite, plan for the 3.8 percent. By the time the platform sells, you are typically a W-2 employee of the management company, not an owner who materially participates in the entity whose interest is being sold. If the holding company is a corporation, gain on its stock is investment income by definition. Budget 23.8 percent federal on the rollover exit, not 20.
What does state tax do to the number?
State tax is the largest variable most physicians underestimate. Capital gains are taxed as ordinary income in California and New York, and the state tax is now mostly non-deductible on your federal return.
| State | Top rate on capital gain | Notes |
|---|---|---|
| California | 13.3% | 12.3% plus the 1% mental health tax above $1 million of taxable income. No preferential capital gains rate. Installment payments received after you move out of state are still California-source if you were a resident at the time of sale. California page. |
| New York State | 10.9% | Top rate applies above $25 million; 9.65% to 10.3% in the $1 million to $25 million range. New York City residents add 3.876%. A 338(h)(10) or asset sale of a New York practice is New York-source income even for a seller who has moved away. New York page. |
| Texas | 0% | No personal income tax. The entity may owe franchise tax on a one-time asset sale if total revenue passes the threshold. Texas page. |
| Florida | 0% | No personal income tax and no estate tax. Florida page. |
The federal deduction for state taxes is capped at $40,400 in 2026, and the cap shrinks by 30 cents for every dollar of income above $505,000 until it reaches $10,000. A sale year puts nearly every physician at the $10,000 floor. In practical terms, the state tax on your sale is paid with no federal offset. Where your state offers a pass-through entity tax election (California and New York both do), electing it for the sale year can move the state tax to the entity level where it is deductible. The rules have deadlines and prepayment requirements that must be met before closing, so raise this with your CPA early.
Moving to a no-tax state before the sale is the strategy every seller asks about. It can work, but only if the move is real and comes before the sale, and even then California and New York have rules that reach back. The California and New York pages cover residency tests, sourcing rules for goodwill, and why moving in the year of the sale is the highest-audit-risk pattern there is.
What about earnouts, seller notes, and holdbacks?
Money you receive later is generally taxed later under the installment method, with the same character it would have had at closing. Three details matter. Each deferred payment carries imputed interest, which is ordinary income. If the payment depends on your continued employment, the IRS can treat it as compensation, which means ordinary income plus payroll tax. And if you hold more than $5 million of installment obligations at the end of the year, Section 453A charges you interest on the tax you deferred, and that interest is not deductible. The earnouts and installment sales page works through the numbers.
When does none of this planning help?
There are situations where the tax structure is not the issue and you should not spend money optimizing it.
- If the offer is a small add-on price from a single buyer with no competing bid, the allocation is often non-negotiable and the bigger question is whether to sell at all. Read should I sell to private equity first.
- If you are within a year or two of retirement and will not sign an employment agreement, the non-compete and consulting allocations that hurt working physicians may barely apply to you.
- If your entire price is under a few million dollars and you live in a no-tax state, the federal capital gains treatment on goodwill is already the outcome, and a $15,000 tax planning engagement may not pay for itself.
- If the letter of intent is already signed and exclusivity has started, most of the structural levers are gone. What remains is timing (which tax year the deal closes in), charitable planning that must be finished before the sale is certain, and the retirement plan deduction.
The order to make decisions
Before the letter of intent
Confirm your entity type and the age of your S election. Decide whether personal goodwill is available to you (it requires that you not already be bound by an employment agreement and non-compete with your own practice). Decide whether a charitable remainder trust or donor-advised fund gift makes sense; both must be done before the sale becomes practically certain. Model the deal in the calculator with realistic allocations.
During negotiation of the LOI and purchase agreement
Negotiate the allocation, the rollover code section and vesting, the structure of any earnout, and who pays for tail coverage. If your state offers a pass-through entity tax election, confirm the deadlines and prepayments.
Before closing
Adopt and fund a cash balance or profit sharing plan if the deduction is worth it. Confirm the timing of the closing relative to the tax year. If you are moving states, understand that the move must be complete before the sale, and that installment payments may still be taxed by your old state.
After closing
File Form 8594 consistently with the buyer. Set aside the tax in cash, because it is due with your estimated payments, not next April. Then turn to planning as a W-2 employee and to the concentration risk of the rollover equity.
None of this requires a tax specialist to be in the room at every meeting. It requires someone who has seen the full picture before the letter of intent, when the words in the allocation can still change. That is the review we offer, and the case study shows what it looked like for one dermatology partner.
Questions people ask
Is the sale of my medical practice taxed as capital gains or ordinary income?
Both. Goodwill, which is usually most of the price, is long-term capital gain at 20 percent federal. Payments allocated to a covenant not to compete, to consulting or transition work, to your accounts receivable, and to equipment you already depreciated are ordinary income at up to 37 percent. The purchase price allocation in the contract sets the split.
Is rollover equity taxable when I sell to private equity?
Usually not at closing. If the deal is structured as a contribution to a partnership (Section 721) or to a corporation where the contributors hold 80 percent control (Section 351), the rolled portion is deferred. Your basis carries over, so the full gain is taxed when the rollover equity is sold later. The cash you take at closing is taxed now.
Do I owe the 3.8 percent net investment income tax on my practice sale?
Often not on the sale of the practice itself. Gain from a trade or business in which you materially participate is excluded from net investment income under Section 1411. You should expect the 3.8 percent tax to apply later when you sell rollover equity, because by then you are usually a W-2 employee of the management company rather than an active owner of the entity being sold.
How is the non-compete payment taxed in a practice sale?
As ordinary income to you, at up to 37 percent federal, plus state tax. It is not subject to self-employment tax. The buyer deducts it over 15 years no matter how long the covenant lasts, so buyers are often indifferent to how much goes here while sellers care a great deal.
What is depreciation recapture on practice equipment?
If you wrote off equipment using bonus depreciation or Section 179, the gain on that equipment up to the amount you deducted is taxed as ordinary income under Section 1245. It is recognized in the year of sale even if the rest of the price is paid over time. With lasers, scopes, imaging, and dental chairs, this can be a meaningful number.
Can I deduct my state income tax on the sale?
Mostly no. The 2026 federal SALT deduction cap is $40,400, but it phases down by 30 percent of income above $505,000 and bottoms out at $10,000. A sale year puts almost every seller at the $10,000 floor. A pass-through entity tax election, where your state offers one, can move some of that state tax to the entity level where it is deductible.
Does an installment sale or earnout lower my tax?
It spreads the tax over the years you receive payments, which can help. It does not lower the rate on the gain. Deferred payments carry imputed interest that is ordinary income, and if more than $5 million of installment obligations are outstanding at year end, Section 453A charges you interest on the deferred tax.
Does QSBS (Section 1202) apply to a medical practice sale?
Not to the practice itself. Section 1202 excludes businesses in the field of health. Whether stock in a management company that you receive as rollover could qualify is unsettled and should not be counted on. See our QSBS and Opportunity Zones page.