Buyers and sellers have always taken the taxes and, of course, the tax law into account when evaluating a potential transaction. Sellers want to ensure that the proceeds they receive, net of their tax liability, are appropriate for what they think the company is worth. Furthermore, buyers want to make sure the financial return they make after spending taxes will justify their investment price. While taxes have always been an essential consideration, the Tax Cuts and Jobs Act has scored some new twists that need to be thought about .
Laws and Numbers to Know
As a common rule of thumb, buyers want to buy assets, and sellers want to sell the property. The primary purpose is that buyers want to withdraw any liabilities (known or unknown) that they will feel like part of the property of the business stock. In addition, in an asset acquisition, buyers take a tax authority in the assets equal to the selected purchase price that can be amortized or lowered. In contrast, the buyer’s discount and amortization are restricted to the target’s assets’ living tax net book value when acquiring business stock.
A buyer’s ability to amortize and lower the purchase price has always been an attractive asset purchase aspect. The development of the bonus depreciation practices as part of tax change has now made this even better. Restricted property (generally, tangible personal property) acquired after September 27, 2017, and before January 1, 2023, is available for a 100% bonus discount. In addition, tax reform increased the sense of adequate property to include most “used” property. This indicates that buyers can now get a simple upfront deduction for the portion of the purchase price allotted to such property. The bonus discount deduction will phase down 20% per year starting in 2023.
The Seller’s Perspective
On the flip side, sellers usually want to sell stock to have the business taxed at the special capital gains rate. The agent often increases their tax liability in an asset sale because some items can be taxed as regular income rather than capital gain. Sellers of investments in partnerships and LLCs taxed as partnerships usually result from an asset sale because of unique business look-through rules.
Most generally, expected income returns from the recapture of past discount and amortization results and the sale of certain assets—such as cash basis accounts receivable—that were not before taxed because the seller used the cash support of accounting.
What About C Corporations?
The tax advantages of selling stock are even more critical for C corporation stockholders because it simply allows them to avoid the “double tax” of having the company pay tax on the asset sale gains in interest to the shareholders on the number of the sales profits.
Furthermore, some sellers of single C corporation stock may change for the capital gain elimination available under IRC 1202—not new to tax reform—that will allow them to eliminate all or a portion of the gain on the sale of their property (limited to the greater of $10 million or ten times.
Qualification for the IRC 1202 suspension depends on several factors, including how the stock is received, the holding time of the store, and the nature and size of business at the time of issuance of the stock. For the 50% and 75% exclusions, there is a specific tax rate on the portion not excluded and certain changes required for alternative minimum tax plans.
Puzzled in all of these numbers and laws to adhere to?
Leo Berwick can help.
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