Download - Taxation session
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
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PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
TAXATION – BUYING & SELLING AN AGENCY
Presented by:Kevin W. Smith, CPA, CIC
Mystic Capital Advisors Group, LLCwww.mysticcapital.com
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
TAX CONSIDERATIONS IN BUYING / SELLING AN AGENCY
Seller’s Goals – To maximize capital gains treatment & minimize ordinary income tax rates
Buyer’s Goals – To maximize deductions (amortization/depreciation)
Federal Tax Rates Individual CorporateOrdinary Income 39.6% 35%Capital Gain 15/20% 35%
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
TRANSACTION STRUCTURE
Stock Sale
Asset Sale
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
STOCK SALE
Seller’s Perspective‐ Favorable‐ Difference between proceeds & cost basis is subject to capital gain
Buyer’s Perspective‐ Poor‐ Buyer has basis in stock, but no depreciation &/or amortization‐ Buyer now assumes the Target’s liabilities
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
ASSET SALE
Seller’s Perspective‐ Not as favorable due to the potential of ordinary income for a portion‐ Portion not subject to ordinary income tax would be capital gains‐ Potential for double taxation if the Seller is a “C” Corporation
Buyer’s Perspective‐ Favorable‐Will have basis in assets equal to purchase price allotment‐ Purchase price is allotted among fixed assets and intangible assets‐ Fixed assets are depreciated over the estimated useful lives (per IRS)‐ Goodwill is amortizable over 15 years‐ Buyer is not responsible for Seller’s liabilities
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
STOCK SALE (BOTH “S” & “C” CORPORATIONS) – ILLUSTRATION
Seller’s Perspective
Proceeds $5,000,000Less: Basis (500,000)
Gain on Sale $4,500,000Capital Gains – 20% 20%
Capital Gains Tax $ 900,000
Buyer’s Perspective‐ Basis ‐ $5,000,000‐ No future deduction for amortization &/or depreciation
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
ASSET SALE ( “C” CORPORATIONS) – ILLUSTRATION Seller’s Perspective
Proceeds $5,000,000Less: Corporate Basis (1,900,000)
Gain on Sale $3,100,000Corporate Gain on Sale 35%
Corporate Tax $1,085,000
Cash Distributed to Shareholder $3,915,000Less: Basis (500,000)
Individual Gain on Sale $3,415,000Capital Gains Tax on Sale 20%
Capital Gains Tax – Individual $ 683,000
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
ASSET SALE ( “C” CORPORATIONS) – Continued
Asset Sale –Corporate $1,085,000Individual 683,000
Total Tax Paid $1,768,000
Stock Sale –Individual $ 900,000
Thus, the Asset Sale resulted in an ADDITIONAL $868,000 in tax paid by the Seller.
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
“C” CORPORATION ALTERNATIVE (STOCK SALE)
Proceeds (85% of $5,000,000) $4,250,000Less: Basis (500,000)
Gain on Sale $3,750,000Capital Gains – 20% 20%
Capital Gains Tax $ 750,000
Asset Sale –Proceeds $5,000,000Total Tax 1,768,000
Net Proceeds $3,232,000 Stock Sale –
Proceeds $4,250,000
Total Tax 750,000Net Proceeds $3,500,000
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
ASSET SALE – S CORPORATIONS Favorable – See previous example
Must attach Form 8594 by the Buyer & Seller (Purchase Price Allocation)‐Must agree in between the Buyer & the Seller
Must have always been an “S” Corporation or have met the time threshold for conversion
Tangible Assets, Covenant Not to Compete & Goodwill
Covenant Not to Compete‐ Seller – Ordinary Income (not subject to Self‐Employment Tax)‐ Buyer – Amortized over 15 years (even if the underlying term is shorter)
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
PERSONAL GOODWILL – A POTENTIAL ALTERNATIVE
Value of the business is attributable to the Principal & not the Company‐ Requires documentation of the business relationships being with Owner‐ Requires the services of a Valuation Expert to quantify the Personal GW
Tax Effects to Seller‐ Goodwill attributable to the Principal is NOT subject to corporate tax‐ Personal Goodwill is taxed to the Principal at capital gains rates‐ Goodwill attributable to the Company is subject to TWO levels of tax
Tax Effects to Buyer‐ No difference‐ Goodwill is amortized over 15 years, regardless of where attributed
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
“S” CORPORATION CONVERSION May convert from a “C” Corporation to an “S” Corporation (Form 2553)
Generally, to achieve the full benefits of the conversion, must have made the election at least 10 years prior to the date of the transaction
If less than 10 years, subject to the Built‐In Gains Tax (essentially the difference between the fair market value of the Company’s assets on the day the election is effective & their tax basis)
Value in excess of the Conversion / Valuation date is not subject to the Built‐In Gains Tax, but rate simply individual capital gains tax
Valuation of assets as of the effective date of the “S” Election (if not, run the risk of the full amount being subject to the Built‐In Gains tax)
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
INSTALLMENT SALES Installment Sale
‐ Sale of a business over time‐ Seller recognizes gain as the payments are made‐ Exception – Depreciation recapture must be reported in the year of sale‐ Depreciation Recapture = Ordinary Income
Seller’s Perspective –‐ Capital gain as payments are received based upon the gross profit %‐ Exception – Depreciation Recapture
Buyer’s Perspective –‐ Purchase price is allocated in the same manner as an all cash deal
Interest – Must be stated in the agreement, or it will be imputed‐ Purchase price is allocated in the same manner as an all cash deal
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
SECTION 338(h)(10)
Stock is purchased, but the transaction is treated as if assets were purchased
Only available to corporations filing consolidated returns and to “S” Corporations
Same tax effects as an Asset Purchase
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
WRAP UP Goal = One level of tax.
If not already an “S” Corporation, make the S Election & start the clock running on the 10‐year window
Sell stock when possible (although generally less feasible)
Minimize amounts subject to ordinary income tax rates, such as covenants not to compete and consulting agreements
Buyers – Strong preference to purchase assets, not stock, which results in depreciation/amortization of the purchase price