Taxes in Business Mergers and Acquisitions

1. Mergers and acquisitions can be structured as either a stock purchase or an asset purchase for tax purposes.
2. The current 21% corporate federal income tax rate makes buying the stock of a C corporation more attractive, as the corporation will pay less tax and generate more after-tax income.
3. Individual federal tax rates have been reduced, making ownership interests in S corporations, partnerships, and LLCs more attractive, as passed-through income from these entities will be taxed at lower rates on a buyer’s personal tax return.
4. A buyer can also purchase the assets of a business if they only want specific assets or product lines.
5. In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” – Buyers prefer to purchase assets rather than ownership interests to generate enough cash flow, limit exposure to undisclosed liabilities, and minimize taxes after the deal closes.
– Stepping up the tax basis of purchased assets allows buyers to lower taxable gains and increase depreciation and amortization deductions.
– Sellers generally prefer stock sales to minimize the tax bill from a sale, as liabilities transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain.
– Professional tax advice is recommended when negotiating the purchase or sale of a business, as it can have significant tax implications. – Tax rates have decreased for middle-income earners.
– Small business owners may be eligible for new tax deductions.
– Proposed changes to capital gains taxes could impact investors.

How Do Taxes Factor Into an M&A Transaction?