Purchase price allocation

Purchase price allocation is how the total price paid for a practice gets divided, on paper, among the different categories of what was actually purchased: tangible equipment, patient charts and goodwill, a non-compete agreement, and sometimes real estate if it's part of the deal. This allocation is not just a formality; it directly determines how the buyer can depreciate or amortize different parts of the purchase for tax purposes in future years, and how the seller is taxed on the proceeds today.

Because buyer and seller are taxed differently depending on how the price is allocated, this is a genuine point of negotiation, not a mechanical step that happens automatically after the price is agreed. A buyer generally benefits from allocating more of the price to categories that depreciate or amortize faster, while a seller's optimal allocation often points the other way, particularly around goodwill versus a non-compete.

Getting this right requires a CPA experienced in practice transitions specifically, since the IRS requires both parties to report a consistent allocation, and a mismatch between what the buyer and seller each file is a red flag that invites additional scrutiny from both sides' returns.