The income taxes involved in buying or selling a business are complex. Taxes will likely be the seller’s largest expense. The purchaser’s taxes, initially, are not as significant, but will add up over time. This section highlights the major tax issues for both parties.

  • Both parties should consider structuring the deal around the seller taking advantage of the preferential capital gains/dividend rates to possibly reduce the price, while the seller maintains the same after-tax cash.
  • If my circumstances are applicable and if the purchase price is financed, have I considered the tax efficient model of: (1) accepting a down payment equal to the value of the inventory or accounts receivable being sold; (2) instead of selling depreciable assets, leasing them over their remaining useful lives; and (3) accepting a note payable for the goodwill or other intangibles?
  • The seller generally prefers to sell stock or membership units. This avoids or can mitigate double taxation issues as well as limiting liability.
  • If assets are sold, the purchase price needs to be allocated among the assets. The purchaser generally desires to have the price allocated to shorter life assets, while the seller may prefer allocations to goodwill.

    Tax Tip! – Purchase price negotiations can sometimes be resolved by finding an asset price allocation which is favorable to one party and a non-issue to the other.

  • If the purchase money is financed, the buyer should consider the different options available to repay the debt because the tax savings can be significant depending how the deal is structured. When financing the purchase price for corporation stock, it may be more advantageous for the corporation to redeem its stock and the new owner purchase a few shares.
  • Be aware that employment taxes are incurred with consulting agreements.
  • If assets are sold, the seller generally has more tax issues to resolve including capital loss limitations and ordinary income recapture rules.
  • When a regular corporation sells assets and then distributes proceeds to stockholders, double taxation issues exist.
  • In some circumstances a purchaser can buy stock or membership units and then write the assets up to the purchase price and then start depreciating the assets at the higher cost basis.
  • An installment sale can be an excellent opportunity for tax savings or tax deferment.

    Tax Tip! – If a transaction is expected at the end of a year, it is generally preferable for the seller to receive part of the proceeds in the first year and the remaining proceeds in the following year.

Typically, the best time for tax planning for selling a company starts with proper entity selection when beginning the business.