Strategic Tax Planning for Medical Practice Owners: Leveraging Charitable Bunching to Help Reduce Taxes

As we navigate the complexities of the economic landscape in 2024, business owners, particularly those in the medical field, are faced with rising input costs and a challenging employment environment. The combination of a robust economy and high practice valuations has prompted many doctors to contemplate life beyond their practice. However, the looming concern for those considering a sale revolves around taxes. In this article, we delve into a strategic financial move called "charitable bunching" that can assist practice owners in navigating the tax environment and optimizing their returns.

Considerations to Offset Tax on a Business Sale – Charitable Bunching

Understanding Charitable Bunching: In essence, business owners with a philanthropic mindset make a substantial donation in the year of the sale of their practice in an amount that is often multiples of their regular annual gift. For instance, an individual accustomed to donating $30,000 annually to nonprofits would contribute $300,000 in the year of the sale. This approach could be more advantageous during the sale year as it offsets ordinary income taxes, which are typically higher than capital gains rates.

Leveraging Existing Charitable Tools: Many business owners, including those in the medical field, are accustomed to donating to nonprofit organizations through a vehicle known as a donor-advised fund. This type of fund facilitates an immediate tax deduction in the year contributions are made, even if the donations will be spread out over several years. This strategy could be particularly beneficial for individuals with higher-than-normal annual incomes, making it a compelling option for anyone considering a business sale in 2024.

Navigating Tax Implications: When a business is sold, most of the sale amount is allocated to goodwill and taxed at capital gains rates. Simultaneously, other income from the business is subject to ordinary income tax rates, which go as high as 37%. Charitable tax deductions are first applied to ordinary income, which may be taxed at a high rate in the year of the sale.

Maximizing Tax Savings: For an owner who donates $300,000 to a donor-advised fund in the sale year, the total tax bill could be reduced by up to $111,000, representing 37% of the deduction. While an annual donation after sale of $30,000 still provides benefits, the advantage diminishes in retirement due to lower income and therefore tax rate as well as the availability of the annual standard deduction of $29,200, both limit the benefit of future donations.

Advanced Planning Point: Owners can further enhance their potential tax savings by making the initial $300,000 contribution in common stock that has appreciated within the owner's after-tax retirement accounts. This could allow for the same $300,000 charitable deduction while bypassing any capital gains tax on selling those securities in the future.

While the sale of any business remains a complex transaction, the strategic use of charitable bunching not only allows owners to reduce their taxes but also enables them to make impactful contributions to their community. As you consider the sale of your practice in 2024, exploring this tax-saving strategy may be a crucial consideration in your financial planning toolkit.


Eric Harbert

Eric Harbert

Partner, Wealth Advisor

Eric is a Partner, Wealth Advisor in our Charlotte, NC, office. Prior to joining legacy firm Brightworth, Eric worked in Wealth Advisory and Tax Compliance for a Charlotte-based accounting firm. Eric graduated from UNC Charlotte with a bachelor’s and master’s degree in accounting. Eric is a CERTIFIED FINANCIAL PLANNER™ professional and Certified Public Accountant. He and his wife, Angela, have three young children and live in Denver, NC.

During Eric’s free time, he enjoys playing golf and traveling with family.


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