Acquisition Planning for a Tax Basis Step-Up

When you buy a business, you can use certain methods to increase the value of its assets for tax purposes. This can give you a big tax advantage and help you save money. It can also give the seller more bargaining power in negotiations. So, it’s important to plan for this when buying a business. When a buyer wants to purchase a company, they can either buy the company’s stock or its assets. Buying the stock means they take on all the company’s liabilities, while buying the assets lets them avoid the liabilities. The seller, on the other hand, prefers to sell the stock because it means they only have to pay taxes once, whereas selling the assets can result in double taxation. But there are ways to structure the deal to benefit both the buyer and the seller. If the company being bought is a single-member LLC, buying all of its interests means the purchaser gets the company’s assets at their cost basis. If the buyer only purchases some of the interests, the transaction is treated as if the seller sold a part of each asset to the buyer, and then both parties contribute the assets to the LLC. This results in a tax basis step-up for the buyer. If someone buys all the ownership in a partnership, it’s treated like the partnership is selling all its stuff to the old owners, and then the buyer is buying the stuff from them. If the price is higher than what the stuff is worth, the buyer gets a good deal. When you buy a part of a partnership, the partnership’s assets usually don’t get a higher value. But if the partnership has a special tax election, the value of the assets can go up when you buy in. This helps the new owner for taxes, but the partnership has to do extra work to keep track of it. For a corporation, the assets only get a higher value if the corporation makes a special election when you buy in. We are looking for a corporate purchaser who wants to buy a C corporation and is considering making a Section 338(g) or Section 338(h)(10) election. These elections allow the purchaser to step-up the value of the target’s assets for tax purposes. The 338(g) election is usually only worth it if the target has a lot of net operating losses or is a foreign company. The 338(h)(10) election is more common and requires consent from both the buyer and seller. It’s important to consider these options carefully to minimize tax costs and make sure everyone involved agrees. The rules for a §336(e) election in 2013 do not require the buyer to be a certain type of corporation. This election is similar to a §338 election and allows the aggregation of all stock of a company transferred to different buyers. The tax costs are dealt with by the selling company, not the buyer. The buyer should protect their interests in the purchase contract and consider whether a §336(e) election has been made. In conclusion, both the buyer and seller can work together to find the best way to maximize the value of the transaction. If you buy a company’s stock, you could get tax benefits if the company has valuable intangible assets. Buying stock also makes it easier to deal with the company’s contracts. If the company is a limited liability company, it’s easier to transfer all its debts. When a partnership sells assets, the buyer can get tax benefits if the partnership makes a special tax election. This can be important for private equity deals. When a corporation is bought, the buyer can make an election that allows them to treat the purchase as if they bought the target corporation’s assets instead of its shares. This can have tax benefits for the buyer. Both S corporations and C corporations can make this election. The tax consequences of this election are complicated and involve calculations of deemed sale prices and adjusted basis. There are also special rules for foreign target corporations. Overall, this election can have significant tax implications for both the buyer and the seller. The Treasury Department enacted regulations in 2013, allowing certain sales of stock to be treated as a sale of the assets of a corporation. These regulations provide rules for making this election and require both the seller and the corporation to file the election statement on their tax returns. This allows for better communication and reduces the potential for surprises.

Source: https://www.floridabar.org/the-florida-bar-journal/acquisition-planning-for-a-tax-basis-step-up/