Q&A: Deducting a stock purchase

December 5, 2008
David J. Schiller, JD

The author is a Norristown, PA tax and estate-planning specialist, and an editorial consultant to this magazine.

I recently purchased a medical practice by buying stock from the retiring doctor. My accountant told me that I am not able to take a tax deduction for my down payment or subsequent payments to the bank. Why?

Q: I recently purchased a medical practice by buying stock from the retiring doctor. My accountant told me that the transaction should have been structured differently, and that I am not able to take a tax deduction for my down payment or subsequent payments to the bank. Why?

A: The purchase of stock, whether the business is a medical practice or a publicly traded company, is never deductible. Interest payments, however, are deductible. Although you will have a "basis" in the stock that will help you should you decide to sell the practice in the future, there is no current tax benefit. Instead, most advisers structure transactions so that you buy the practice's assets instead of buying the stock. Assets include goodwill, office equipment, medical equipment, supplies, and possibly accounts receivable. When buying the assets of a business, you are able to take a deduction either up front or over several years, depending on the category of assets involved. This is quite valuable, as the current deduction eliminates tax on a portion of your income, subsidizing the after-tax cost of your purchase.

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