Instead, many buyers seek to purchase the business in a way where they may recover some of their cost more quickly through amortization, depreciation and other ordinary deductions. A purchaser in a stock sale cannot deduct any of the purchase price until they sell the stock, which could be an unacceptable recovery period for a buyer interested in a continuing interest in a business. Many sellers prefer stock sales to asset sales however, this may not produce a favorable outcome from the buyer’s perspective. This tax could add an additional 3.8 percent tax on top of the otherwise applicable amount. Consideration should also be given for any effect of the Net Investment Income Tax to a seller holding a business interest as an individual or through an estate or trust. Any gain will be taxed at capital gains rates according to the seller’s holding period. Sellers will recognize a gain to the extent the sales price is higher than their cost basis of the stock. The asset allocation can directly affect the buyer and seller’s tax treatments.Ĭonsequences of a stock sale are realized at closing. A buyer and seller not only have to agree to a price, but they also have to agree on how that price will be allocated to the assets. An asset sale can add additional complexity. Selling stock is fairly straightforward the buyer and seller agree on a price and exchange the stock for cash. The tax consequences and mechanics differ for each transaction. Generally, there are two ways a company is sold: through the purchase of a seller’s stock or the company’s assets. This article will focus on the tax aspects involved in the sale of a pass-through business, particularly as it relates to S corporations. What’s most favorable to the buyer often isn’t optimum for the seller, and vice versa. Each side of a transaction, i.e., buyer and seller, have differing interests in the tax implications of the deal, and each side will want to structure the deal with the most favorable outcome. Getting appropriate and timely input from qualified professionals at an early stage in the process can further these goals and reduce overall stress. Structuring these transactions appropriately can help minimize taxes and maximize after-tax proceeds. The process of buying or selling a business is filled with many daunting but effective decisions a business owner can make to impact the profitability and continuity of the business.
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