Q I am considering selling my practice sometime soon. I discussed these plans with my CPA, and he told me I would be required to immediately pay tax on all the gain from the sale, regardless of when I received payment. I told him this did not seem to be right, since I thought I could report the gains on an installment basis, paying tax on them as they are received. He said this used to be the case, but the tax law had changed. Is he correct?
A No. The Tax Relief Extension Act of 1999 amended Section 453 of the tax law denying installment reporting on sales of businesses, but only for taxpayers reporting on the accrual basis. Since your practice should be eligible to remain on the cash method of reporting, this new tax law provision should not affect you.
Therefore, you should be eligible to report the gain on the installment method, paying tax only as amounts are actually received. However, you are required to recapture previously taken depreciation deductions, on which gain remains immediately recognizable.
Q I am in the process of purchasing a practice. In connection with that transaction, a friend of mine advised me to take a substantial allocation of the purchase price to the practice-management software I’m buying. He says that would be immediately deductible, while I would be forced to have longer write-off periods for payments made for other types of assets. Is this a good idea?
A No. Your friend is incorrect. Under Section 197 of the tax law, if software is purchased as part of a practice acquisition, the software cost must be amortized (written off) over a 15-year period. Alternately, if computer software is purchased in the ordinary course of business, not relating to the purchase of a practice, a three-year write-off period is allowed. However, if the computer software cost is bundled as part of the total computer cost, it must be written off over the normal period relating to the purchase of the computer hardware (five years).