Most dentists who buy a practice expect to write off what they paid. Then the first tax return after closing comes back, and the deduction is a fraction of what they pictured.
We see some version of that every tax season, and it almost always traces back to one page of the closing documents that nobody read closely. That page splits your price between equipment and goodwill, and getting it right means your real equipment gets written off quickly.
Pushing the split too far in your favor has its own cost, because the IRS can redo it later and add penalties and interest. So the goodwill allocation strategy you want is the one that matches what you actually bought.
The Bill Of Sale Is The Blueprint For Your Dental Practice Deductions
Most practice purchases are asset sales. The asset purchase agreement (APA) is the long legal document, but for taxes the page that matters is the bill of sale, because it breaks the price down line by line.
Think of it like a Costco receipt. You don’t pay one mystery number at the register; the receipt shows what each item cost. The bill of sale does the same for your practice: this much for the chairs and the CBCT, this much for leasehold improvements, this much for supplies, and this much for patient records, goodwill, and the non-compete.
Those lines fall into two big buckets. Anything you can touch, like cabinetry, chairs, imaging, and the plumbing under your ops, is equipment. Anything you can’t touch, like the patient base and your name in the neighborhood, is goodwill.
Which bucket a dollar lands in decides how fast you get to deduct it. Knowing how the IRS fills each bucket starts with the equipment side, because that one gets filled first.
Equipment Gets Its Real Value, And Goodwill Gets Whatever Is Left
The IRS doesn’t let you pick the split out of thin air. A practice sale has to use the residual method, which means each class of assets gets valued first, and goodwill absorbs whatever is left of the price.
The Form 8594 instructions put it plainly: the amount allocated to an asset other than goodwill “cannot exceed its fair market value on the purchase date.” Your old operatory chairs can’t be worth more on paper than they’d sell for.
So the goal is making sure everything that really belongs in the equipment bucket gets counted there, at what it’s really worth. That means the newer CBCT, the build-out the seller paid for a few years ago, and the supplies on the shelves.
Seller-drafted allocations often lump all of that into goodwill because it’s simpler to write. Why that costs you comes down to how slowly goodwill comes off your taxes.
Why Does Goodwill Take 15 Years To Write Off?
Goodwill, along with patient records and the non-compete, is what the tax code calls a Section 197 intangible. You write it off in equal pieces “over the 15-year period beginning with the month in which such intangible was acquired.”
Let’s look at an example we walk dentists through all the time. Say you buy a practice for $300,000 and the bill of sale puts $150,000 in goodwill. Spread that goodwill over the 15-year period and you get $10,000 a year in goodwill deductions.
That comes as a real surprise when the buyer expected to write off the full price in year one. You do get the deduction eventually; it just arrives a little at a time for 15 years.
The equipment bucket moves much faster. The IRS says the One Big Beautiful Bill Act “reinstated the 100% special depreciation allowance” for qualifying property acquired and placed in service after January 19, 2025, and that can include used property like the equipment in an existing practice.
We wrote more about what changed in the new tax law for dentists. That gap between 15 years and year one is exactly why the next decision tempts so many buyers.
Pushing Your Dental Practice Allocation Toward Equipment Can Backfire
Once buyers see that math, the urge is to call nearly everything equipment and leave goodwill as a sliver. That can hold up if you’re buying something close to a shell, an office collecting very little where you’re mostly paying for chairs and a lease.
It doesn’t hold up on a practice with real revenue and a reputation in town. The IRS can challenge a split that was moved in your favor for tax purposes and come back for the taxes along with penalties and interest.
Favorable tax treatment is fine as long as it lines up with reality. A written allocation that both sides sign is binding on both of you, but Section 1060 lets the IRS set it aside if it decides the split “is not appropriate.”
There’s a second check on reality built into every deal, which brings us to the seller.
Why Does The Seller Want A Different Goodwill Split Than You?
The seller wants more in goodwill and you want more in equipment, so it’s always a bit of a push and pull. On a practice the seller built, goodwill usually gets capital gains treatment.
Equipment the seller already depreciated is different. The IRS says that gain “is treated as ordinary income to the extent of depreciation allowed or allowable on the property” in Publication 544, which means it’s taxed as regular income.
That tension helps you in one way. Because the seller has a reason to keep equipment low, a split you both agree to is more believable than one either side wrote alone.
You’ll both report the split on Form 8594, the asset acquisition statement, and attach it to your returns. When the two forms match, there’s far less reason for a second look. We covered where Form 8594 fits in the bigger picture in how much you should pay for a dental practice.
If the amount allocated to an asset changes after the sale year, for example through a price adjustment, whoever is affected files a supplemental 8594. Short of that, reopening the split after closing is hard and rarely worth it.
One line on the bill of sale trips buyers up more than the rest: the non-compete, so we’ll look at that next.
The Non-Compete Sits In The Goodwill Bucket For Dental Practice Buyers
Almost every practice sale includes a non-compete, the seller’s promise not to open a competing office nearby for a set number of years. For you as the buyer, the tax code lists “any covenant not to compete” made when you buy a business as a Section 197 intangible.
That means it comes off your taxes over the same 15 years as goodwill. Making the non-compete line bigger doesn’t speed anything up for you.
What matters is that the non-compete is real, written into the APA and carries a number someone can explain. A round number dropped in because it felt right is the kind of line that draws questions later.
All of this is easier to fix before anyone drafts the APA, so the next question is timing.
When Should You Raise Goodwill Allocation When Buying A Dental Practice?
Raise it at the letter of intent (LOI), the short document that sets the price and terms before the attorneys write the APA. If the LOI leaves the allocation open, you still have room to work.
If the first APA draft shows up with the split already filled in, the seller has anchored to a number, and you’re negotiating uphill. Plenty of the buyers who come to us after closing had no idea what their allocation was. They knew some numbers were discussed, but nobody walked them through it, and they were just trying to get the deal done.
Have an attorney on the contract and a CPA on the tax side before you sign. The questions at that stage are what each piece of equipment is worth today, what the build-out cost and when, what’s in supplies, and what that leaves for goodwill.
Our buying a dental practice consulting work starts with exactly those questions. Once the split is set, the next decision is how fast you actually want those deductions.
A Good Goodwill Allocation Strategy Plans Across More Than One Year
The biggest possible deduction in year one isn’t always the best one. If you were a 1099 associate earning less the year you bought, piling every equipment deduction into that year can waste some of it.
Sometimes we take bonus depreciation on part of the equipment and Section 179 on another part, because a Section 179 amount you can’t use yet can be carried to the next year. Spreading deductions out can also help you qualify for the QBI deduction for dentists in a year your income is lower.
We think of it like stacking Jenga blocks across a multi-year profile, which works better than dumping everything into one return. Before you sit down with the seller’s attorney, it also helps to see what the practice is worth so you know what you’re dividing up.
If you’re under LOI right now or planning to buy this year, book a call with Virjee Consulting before the APA gets drafted, while the allocation is still open.
If you liked this, you might also like: Buying a Dental Practice Checklist
About the Author
Omar Virjee, CPA is the founder of Virjee Consulting, a CPA firm specializing in year-round tax planning and monthly bookkeeping for solo and small-group dental practice owners across the United States. Omar focuses on helping dentists maximize owner take-home pay through proactive tax strategy, S-Corp optimization, dental real estate planning, and clear monthly financials.
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