Generally, an asset sale provides the best after-tax outcome to a company buyer and a stock sale results in the best after-tax consequences for the company seller. However, since there are many factors to consider besides tax consequences when buying or selling a business, the tax follow cannot be determined in a vacuum. There will always be an adverse tax effect. Uncle Sam will always get his cut. So, the interrogate becomes which party to the transaction will be responsible for Uncle Sam's cut. Naturally, each party will want the other to pay Uncle Sam. So, there will be negotiations. There will be give and take. To avoid being taken, it is primary to understand the tax laws and assemble the most knowledgeable team of professionals to guide you straight through the transaction process.
If the company being sold is structured as a C Corporation, and the transaction is structured as an asset sale, the follow will be a duplicate tax on the seller. The seller will be taxed at the corporate level when the assets are sold (consideration is received by the existing corporation in which the seller is the primary shareholder) and again at the individual level when the corporation distributes the proceeds to the shareholders. When a C Corporation is sold as a stock sale there is only level of tax on the seller as the proceeds replacement directly to the individual selling the entity.
If the entity being sold is not a C Corp but a pass straight through tax entity, there remains a great probability that the negative tax follow will be on the seller if the deal is structured as an asset sale. In an asset sale the Irs requires that the purchase price for the assets purchased be allocated to the individual assets at fair shop value (the price at which the possession of the asset would replacement in the middle of a willing buyer and a willing seller, neither acting under enforcement and both having inexpensive knowledge of relevant facts). This "step-up" in basis to fair shop value at the time of replacement from the historical carrying cost of the seller provides a tax benefit to the buyer in the form of an added depreciation write-off. Before this depreciation can be determined, the Irs requires that the assets are divided into seven asset classes: (1) cash and cash equivalents (2) actively traded personal property (3) accounts receivable and debt instruments (4) account (5) all other assets not previously classified (furniture, fixtures, equipment, land, vehicles, etc) (6) section 197 intangibles (7) goodwill and going concern value. The classification of each asset determines how swiftly or gently the buyer can depreciate the stepped-up asset and offset his/her operating income.
This funds of purchase price to the dissimilar asset classes is primary to the seller because the seller's gain on the assets will be taxed at ordinary wage rates or capital gains rates depending upon how they are classified. While buyers will lobby that minimal value be allocated to land (not depreciable), buildings, equipment and goodwill (long depreciable life, slower offset to income) and the majority of the purchase price be allocated to account (expensed when sold). Seller's will prefer that the majority of the value be allocated to structure and equipment (which commonly receive capital gains treatment) with minimal amounts allocated to account and non-compete agreements which are taxed at ordinary wage rates for the seller. The seller will also be taxed at ordinary wage rates on any depreciation recapture that must be claimed as a follow of the sale. Depreciation recapture is the amount of depreciation cost taken by the seller during possession of the assets in excess of straight-line depreciation (i.e. Accelerated depreciation).
Note: The funds of the purchase price in an asset sale is only primary to the seller when the entity being sold is a pass-through entity (Llc, Llp, S-Corp, sole proprietorship, partnership) because capital gains rates are preferential to ordinary wage rates Only at the individual level. There is no preferential tax medicine given to capital gains rates at the corporate level. The negative tax follow on a C Corporation asset sale is due in most instances to the duplicate tax medicine of the sale.
In addition to tax considerations, there are numerous other considerations, including legal, which will factor into the decision of either a definite deal is best completed as an asset deal or a stock deal. We will address some of these issues in time to come segments. However, I cannot stress adequate the point of a capability team. One of the team members must be a capability tax professional. The cost of these professionals is typically offset by the benefits they bring to you straight through their involvement in the transaction. You get what you pay for so don't cheap out when assembling your team!
Asset Sale vs Stock Sale - Tax Consequences When Buying or Selling a business
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