What are adjusted net profits, and how do they differ from reported profits on a tax return?

Many buyers and sellers are confused by the term... "Adjusted Net Profits".

Profits on a tax return, simplified, are the remainder of all allowable expenses being subtracted from all revenues collected.

However, that does not take into consideration fictitious expenses, such as depreciation or amortization, nor over or under inflated expenses, such as rent, or salaries that include a non-working spouse or child, or personal expenses which are run through the practice.

Elaborating on that further, many practice owners charge themselves, a much higher rent than what a true tenant would pay, or pay no rent at all.

Similarly, many dentists run personal expenses, such as travel, meals, vehicles, home repairs, etc, through the practice. And depreciation, which can be a significant expense on your tax return, is not an actual payment you make, but rather a deduction allowed.

Adjusted net profits are the true profits. Meaning, the actual money the owner takes home from the practice, at the end of the year, after  accounting for all the adjustments described above.

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