Selling to a DSO? Here's How Each Piece of Your Deal Gets Taxed

Your DSO offer shows one number. Your tax return will see several.

Picture the LOI on your kitchen table. One price. Then your CPA starts sorting it: this much for the chairs and the CBCT, this much for your patients and your name on the sign, this much for promising not to practice down the street. Same price. Very different tax.

Here is the short answer. When you sell to a DSO, you are not taxed on one price. Each piece of the deal is taxed its own way. Goodwill is usually capital gain. Equipment recapture and a non-compete are usually ordinary income. Rolled equity can be deferred, and an earnout may be treated as price or as pay, depending on how it is written. Your CPA sets the specifics.

Two checks, same deal

The number on the LOI is the same either way. What you keep after tax is not.

That split is not an accident. In an asset sale, the price is allocated among the assets under IRC section 1060, and both you and the buyer report that allocation to the IRS on Form 8594 (IRS, About Form 8594). If you and the buyer agree on the allocation in writing, the agreement generally binds you both unless the IRS finds it is not appropriate (IRS Publication 544, "Sale of a Business").

So the tax story of your sale is mostly written in the purchase agreement, before you sign.

How each piece of a DSO deal is usually taxed

This table assumes an asset sale by an owner who is not a C corporation. Otherwise the map changes. It is a starting point for your CPA.

Deal piece	Usual treatment	When it is taxed	Ask your CPA
Practice goodwill	Usually long-term capital gain	Year of sale	How much of my price is allocated here?
Personal goodwill	Capital gain only if the facts support it	Year of sale	Do my facts support personal goodwill at all?
Equipment and furniture	Section 1245 recapture is ordinary income; the rest can be section 1231 gain	Recapture is due in the year of sale, even on an installment sale	What did we deduct, and what comes back?
Supplies and receivables	Ordinary income	Year of sale	What is in this bucket for me?
Non-compete	Usually ordinary income to you; the buyer amortizes it over 15 years	Depends on the deal terms	Is the amount assigned here reasonable?
Employment or consulting pay after close	Wages	As paid	Is any of this really price?
Rollover equity	Can be deferred under section 721 or 351 if it qualifies	Often later, at the buyer's next sale	Does this structure qualify?
Earnout	May be treated as compensation if it is really pay for continued work; a truly contingent price can use the installment method	Depends on the deal terms	Is this price, or pay for my chair time?

Each row's IRS or IRC source is listed below.

The two traps owners miss

Recapture shows up in year one. If part of your price is paid over time, you may assume the tax follows the cash. Under IRC section 453(i), depreciation recapture is recognized in the year of the sale, even when the rest of the gain is spread out. You can owe tax on equipment this year while the money arrives later.

An earnout tied to your own chair can be taxed as pay. An earnout may be treated as compensation if it is really pay for continued work. A truly contingent price can use the installment method. Ask your CPA and attorney to read the earnout language together.

What you can still change, and when

Before the LOI, you can shape the allocation, the earnout, and the rollover. After the purchase agreement is signed, most of that is set.

Research I helped underwrite found that among entrepreneurs with $5 million or more of net worth, 58.3% expect tax planning advice from their primary advisor, and only 52.2% receive it (CEG Insights, 2024, p. 10, N = 809). They were not all dentists, but in a DSO sale that gap shows up at the worst moment.

Questions to bring to your CPA and attorney

1. How does the buyer propose to allocate the price across these buckets?
2. Which pieces are ordinary income, and which are capital gain, in my situation?
3. How much recapture will I owe in the year of sale?
4. Is the earnout price or pay, as written?
5. Does the rollover qualify for deferral, and is that treatment stated in the documents?

Who does what

• Your CPA sets the tax specifics and models the allocation.
• Your attorney negotiates the purchase agreement, the non-compete, and the rollover documents.
• Your broker or a qualified appraiser sets the value of your practice. I do not value practices.

My role is to keep all three working from one plan before the allocation is locked.

[[CONFIRM: When I lay a DSO offer out on one page with an owner, the first surprise is usually how many separate pieces were hiding inside one price.]]

Before the letter arrives

Take the table to your next CPA meeting. A blank row is your first question.

Book your 25-minute exploratory call and we will walk through your table together.

So, when your offer arrives, will you see one number, or every piece?

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Sources

1. Internal Revenue Code section 1060 (allocation in applicable asset acquisitions). https://www.law.cornell.edu/uscode/text/26/1060
2. IRS, About Form 8594, Asset Acquisition Statement Under Section 1060. https://www.irs.gov/forms-pubs/about-form-8594
3. IRS Publication 544, Sales and Other Dispositions of Assets (2025): "Sale of a Business" (residual method, asset classes, written allocation agreement), noncapital assets (including receivables), section 1231, and depreciation recapture. https://www.irs.gov/publications/p544
4. Internal Revenue Code section 1245 (ordinary income on depreciation recapture). https://www.law.cornell.edu/uscode/text/26/1245
5. Internal Revenue Code section 197 (buyer's 15-year amortization of goodwill and covenants not to compete). https://www.law.cornell.edu/uscode/text/26/197 5a. Seller side of a non-compete: Muskat v. United States, 554 F.3d 183 (1st Cir. 2009), and Kennedy v. Commissioner, T.C. Memo. 2010-206 (payments for an agreement not to compete are generally ordinary income).
6. Internal Revenue Code section 453, including 453(i) (recapture recognized in the year of disposition), and IRS Publication 537, Installment Sales, including "Contingent Payment Sale." https://www.law.cornell.edu/uscode/text/26/453 and https://www.irs.gov/publications/p537 6a. Treas. Reg. 1.61-2(a)(1) (compensation for services is gross income). https://www.law.cornell.edu/cfr/text/26/1.61-2
7. Internal Revenue Code sections 721 and 351 (nonrecognition on contributions to partnerships and controlled corporations). https://www.law.cornell.edu/uscode/text/26/721 and https://www.law.cornell.edu/uscode/text/26/351
8. Research I helped underwrite: CEG Insights (2024), exhibit "Services Received, Expected, Valued from Primary Advisor (By entrepreneurs with $5 million+ of net worth)," p. 10, N = 809.

This article is for educational purposes only and is not tax, legal, or investment advice. Consult your own qualified professionals about your situation.