Strategies for Corporations

I am an incorporated dentist, age 63, and recently sold my practice. At the time of the sale, the corporation owned my practice assets, including equipment, furniture, supplies and instruments, and patient records, while I owned the office building.

Charles Blair, DDS and

John McGill, MBA, CPA, JD

Question:

I am an incorporated dentist, age 63, and recently sold my practice. At the time of the sale, the corporation owned my practice assets, including equipment, furniture, supplies and instruments, and patient records, while I owned the office building.

Through the years, my professional corporation paid me a monthly salary and a monthly rental fee for the use of my professional office building. My corporation also sponsored a qualified retirement plan and I have funded an IRA.

My attorney had the certified check for the practice-sale proceeds made out to my corporation and deposited it into my corporate bank account. He said that it would be illegal for me to have the check made out to me.

How do I retrieve the money from my corporate account and get it into my personal account while paying the least amount of taxes? My corporate fiscal year ends July 31. Should I dissolve my corporation?

Answer:

In your situation, we first must distinguish between the proceeds received from the sale of your practice and those received from the sale of your office building. As far as your practice-sale proceeds are concerned, the taxation and related strategy will depend upon the type of corporation you are operating. If your corporation has elected to be taxed as a Subchapter S corporation, the corporation generally will owe no taxes when the practice is sold, since all gain and related taxes will flow through to you on your personal income-tax return.

The above tax treatment assumes that you elected to be taxed as a Subchapter S corporation from the inception of the corporation, or that you made the Subchapter S election at least 10 years prior to the sale.

The more likely scenario, however, is that your corporation is a regular (Subchapter C) corporation. As such, all gain on the practice-sale proceeds will be subject to potential tax at the corporate level when the proceeds are received by the corporation, and again to you individually, once the proceeds have been distributed.

To minimize or eliminate corporate-level taxes, we would recommend that the practice-sale proceeds, received by the corporation, be bonused out to you as additional compensation on or before the end of your fiscal year. While this strategy is not without some risk, it may prove effective to provide an offsetting deduction to the corporation, thereby eliminating corporate-level income tax. Of course, you will be responsible for paying federal and state income taxes on the bonus received.

Any proceeds from the sale of your professional office building should have been paid out directly to you. If these proceeds were mistakenly paid to the corporation, you should be able to remove them tax-free, on the basis that the corporation was merely acting as your collection agent.

Since the corporation did not have title to the office building, it should not have received the proceeds and you should be able to retrieve them without corporate-level taxation, on the basis that the proceeds should have been paid directly to you. Generally, the majority of the proceeds received from the sale of a professional office building should qualify for long-term capital gains treatment, taxed at a very favorable maximum-tax rate of 28 percent for current federal income-tax purposes.

Once your corporation has sold its practice assets, the buyer will be the new employer of all staff members. We would recommend that the corporation terminate its retirement plan and file a request with the IRS for a favorable determination letter on the retirement plan`s tax status. Once this has been received, we would recommend that all plan funds be paid out by direct payment to the participants, or directly to an IRA or the new retirement plan (if the buyer has established one). In addition, we would recommend that your proceeds be paid directly to the custodian of a new IRA.

Once all assets have been paid out of the corporation to you individually, and your retirement plan has been properly terminated, the corporation should be dissolved.

Dr. Blair (left) is a nationally-known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($130 a year) and consulting information are available from Blair/McGill and Company, 4601 CharlottePark Drive, Suite 230, Charlotte, NC 28217, phone (704) 523-5882.

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