DDSWhat counts as personal goodwill in a dental practice?
Personal goodwill is intangible value that exists because of the individual dentist, not the business. US Dental Practices lists personal reputation, unique clinical skills, individual patient relationships and a personal referral network, value that may not transfer to a new owner. Practice goodwill is the rest: location, trained team, systems and loyal patients.
Buyers pay for practice goodwill because it survives the change of ownership. The broader goodwill definition and the share of price it usually takes are in what percentage of a sale is goodwill.
Why does the split matter for taxes?
The two kinds of goodwill can belong to different taxpayers. In an asset purchase from a C corporation, proceeds can be taxed at the entity and again when paid to the owner. Transitions Elite calls the C corporation the outlier; personal goodwill sold directly by the dentist can be taxed once as capital gain.
McLerran & Associates says personal goodwill, properly documented and sold directly by the individual dentist, is treated as long-term capital gain. The IRS adds a 3.8% net investment income tax for some taxpayers. S corporations, partnerships and sole proprietors usually face one layer of tax already, so the stakes are smaller.
Rates and their application are a question for your CPA; DDSIntel does not give tax advice.
How do courts decide who owns the goodwill?
Courts ask whether the entity has a contractual right to the dentist’s future services and patient relationships. In Howard v. United States (2011), the Ninth Circuit held that a dentist who practiced under an employment contract with his own professional corporation had transferred the goodwill to it, so the proceeds were corporate income.
The memorandum relies on Martin Ice Cream (1998), which found personal relationships are not corporate assets when the person has no employment contract or non-compete with the corporation. Old paperwork with your own entity can decide the question years later.
What documentation supports a personal goodwill position?
Support has to exist before the deal. McLerran & Associates says a defensible carveout usually needs a separate purchase agreement, a contemporaneous third-party valuation, evidence of personal patient relationships and no binding non-compete with the practice entity. Transitions Elite warns the question is fact-specific, often contested and cannot be built after the fact.
Raise it when you plan due diligence, not after the letter of intent. Both parties report the allocation on Form 8594; the mechanics are in IRS Form 8594 in a dental sale.
How should sellers prepare if personal goodwill might apply?
Start with an entity review two or more years before a sale. Ask your CPA whether the practice is a C corporation, whether you signed employment or restrictive covenant agreements with your own entity, and whether a restructuring would change the analysis. Then keep the valuation and patient-relationship evidence current until closing.
The earnings base a buyer prices matters as much as the allocation; see SDE vs EBITDA and the working capital peg, which moves the final price after closing.
Market pricing context is on practice valuation multiples; owners years from a decision can follow the market through dental transition signals.
Frequently asked questions
Is personal goodwill the same as practice goodwill?
No. Personal goodwill is tied to the individual dentist; practice goodwill is tied to the entity, its location, team, systems and brand.
Who benefits most from a personal goodwill allocation?
Sellers operating through a C corporation, because a direct sale of personal goodwill can avoid entity-level tax on that portion.
Can an old employment agreement eliminate personal goodwill?
It can. In Howard v. United States the Ninth Circuit treated the goodwill as corporate because the dentist worked under an employment contract with his own corporation.
Does the IRS publish a personal goodwill percentage for dentists?
No. Form 8594 uses the residual method and sets no dental percentage; support comes from a valuation and the facts.
Can DDSIntel value my personal goodwill?
No. DDSIntel publishes aggregate education and market data only, never a valuation of a single practice.
Sources
- US Dental Practices. Dental practice goodwill valuation. usdentalpractices.com.
- Transitions Elite. Capital gains tax on selling a dental practice (Sept. 18, 2026). transitionselite.com.
- McLerran & Associates (Dental Transitions). Dental practice sale tax implications in a DSO deal (Oct. 2, 2026). dentaltransitions.com.
- Internal Revenue Service. Net Investment Income Tax. irs.gov.
- U.S. Court of Appeals for the Ninth Circuit. Howard v. United States, No. 10-35768, memorandum (Aug. 29, 2011). cdn.ca9.uscourts.gov.
- Internal Revenue Service. Instructions for Form 8594 (Asset Acquisition Statement). irs.gov.
- Internal Revenue Service. Instructions for Form 4562 (Depreciation and Amortization), Part VI. irs.gov.
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