Are you considering selling your business? Have you considered the tax issues associated with that sale? A seemingly typical sales negotiation and transaction can go bad if tax implications haven’t been property analyzed up front by a qualified professional. It is extremely difficult – and sometimes impossible – to roll back the clock on a negative outcome. Asking important tax questions beforehand can save you wasted time and effort. For example:
Can the purchasing party actually afford to acquire the business if the deal is not structured as an asset purchase?
How much does the seller need to actually net in cash monies after taxes to feel good about the deal?
Will the selling party be willing to accept part cash with the rest equity?
Can the equity be rolled over tax-free?
Do we have minority owners that are not cashing out and will roll over their equity to be part of the new ownership group?
Complicating all these issues is the reality that the tax code is full of irregular code provisions that quite often do not come to light until the deal is nearly complete. Restructuring and back pedaling to make all parties happy is extremely costly and quite often impossible. Consider the following lists of important tax matters that should be thoroughly addressed at the start of any negotiation in order to avoid costly tax scenario ramifications lurking in the horizon.
RE: S Corporation Sec 338(h)(10) and Sec 336(e) Asset Sale Election Format Transactions
- Do you have S Corporation shareholder eligibility issues that you need to administratively correct with the IRS beforehand?
- Do you have multiple shareholders selling? Will obtaining an 80% approval be difficult (if not impossible)?
- Were you aware that minority shareholder stock rollovers are typically taxable events because of the mechanics of the deemed asset sale tax regime?
- Was the business enterprise a former C Corporation with built-in gains income items subject to double taxation?
- Do you have any synthetic equity arrangements with key employees and shareholders (i.e., phantom stock plans, stock appreciation rights) that will be triggered and paid out upon a change of control event. Will these arrangements require special handling, including restructuring in some cases to be deductible as ordinary expense deduction?
- Do you have large recapture income items that are not eligible for installment sale reporting?
- Are you aware that, depending on the facts and circumstances, a premium can be negotiated and paid to a particular selling shareholder? For example, an additional consideration premium can be negotiated (for example, to compensate for the incremental tax incurred under an asset sale) and paid to the all the shareholder on a non-pro-rata basis (i.e., based on his/her particular tax situation) without adversely affecting the S election.
- Are you considering the use of a one-day note to simplify and minimize state tax implications? Is the one-day note being properly structured to qualify for installment sales treatment?
RE: Qualified Subchapter S Subsidiary or Limited Liability Company (Partnership) Sale
- When you sell your Qualified Subchapter S Subsidiary (QSUB) or Limited Liability Company (taxed as a partnership) you are, in essence, selling net assets plus assumed liabilities for tax purposes. Consequently, have you thoroughly examined all the complexities associated with look-through rule provisions to prevent preferential capital gain rate treatment on the built-up appreciation attributable to hot assets (e.g., cash basis deferral, depreciable and amortizable assets, and certain appreciated inventory items)?
- Will the deductibility of assumed liabilities present a challenge because of lack of clear guidance in the current law?
- Are you fully aware of negative tax basis recapture rules?
- Did you know that partnerships generally cannot enter into tax-free reorganization transactions like corporations?
- Have you explored the tax and cost implications of incorporation of partnership to consummate a deal?
RE: C Corporation Stock Sale
- Will there be an assumption of corporate liabilities that are personally guaranteed by the selling stockholders? This generally constitutes taxable consideration to the selling party that needs to be properly structured in order to arrive at the correct economic net effect.
- Are you properly addressing Sec 280G tax implications regarding parachute payments?
- Are you aware of the special rules controlling who gets the tax benefit from the deductibility of employee-related deferred compensation items?
- Is the net operating loss (NOL) carried forward attribute benefit being asserted by the selling party available, or forgone because of Sec 382 limitations?
- Will you be negotiating the benefit of NOL carried back in the purchase price because of large closing expenses including employee compensation items?
- Have you considered whether making a Sec 338(g) election would make sense due to large unused NOL carried forward available to the target in the year of sale?
- The acquisition of a former subsidiaries with NOL carried forward attributes should be closely examined due to complicated regulations that prevent the double counting of the same economic loss by departing subsidiaries under certain scenarios.