Key Tax Considerations: Deciding Between An Asset vs Stock Sale


Stock Sale VS Asset Sale Tax Considerations

Asset sales generally benefit the Business Buyer from an income tax perspective.

Subject to compliance with IRS guidelines, asset sales allow Buyers to "step-up" their depreciable basis in the assets it is purchasing (which emphasizes the importance of the allocation of the purchase price among the purchased assets). A higher acquired tax basis, which usually results from the purchase price paid, is beneficial to the Buyer for purposes of amortization and depreciation. This reduces taxes and improves the Buyer’s cash flow during the vital early years after the purchase.

For Sellers, asset sales tend to generate higher taxes because while intangible assets, such as goodwill, are taxed at capital gains rates, other “hard” assets can be subject to higher ordinary income tax rates based on recapture of depreciation previously taken by the Seller. This is particularly the case for businesses that have significant equipment, such as manufacturing, restaurants, construction, health care, and transportation.

Depending on whether the Selling entity is a "C" Corporation or an "S" Corporation (an election to be treated as a pass through entity for tax purposes), there may also be the very unpleasant prospect of the Seller side of the transaction facing double taxation. The selling entity is first taxed upon selling the assets to the Buyer. The selling entities’ owners are then taxed again when the proceeds are distributed to the selling entities’ owner(s). The double taxation dilemma may not be a concern when the selling entity is an LLC, depending upon how it has previously elected to be taxed.

In Contrast, Stock Sales Generally Are More Favorable to Sellers Tax Wise

Sellers often favor stock sales because generally the proceeds are taxed at a lower capital gains rate, and for "C" corporations the corporate level taxes are bypassed. In other words, the sale of stock alternative is generally more advantageous to the selling shareholders because only one tax will be imposed at the shareholders' level (and usually at long-term capital gains rates).

However (with some limited exceptions), with stock sales, Buyers lose the ability to gain a stepped up basis in the assets and thus do not get to re-depreciate certain assets. The adjusted basis of the assets at the time of sale sets the depreciation basis for the new owner. As a result, the lower depreciation deduction can result in higher future taxes for the Buyer, as compared to an asset sale.

Sales Tax Ramifications of Deals

A California sales tax is generally not imposed on a stock sale transaction, but may be imposed with respect to the sale of tangible personal property in a sale of assets (with various exceptions). The greater the percentage of the sale which is allocated to equipment, the more significant the issue of sales tax liability becomes.

This Article is for general information purposes only. The information provided is not legal or tax advice and does not form an attorney/client relation. You should consult an attorney for specific advice concerning your particular matter, as the underlying facts and circumstances significantly impact the legal advice which may be appropriate.

Categories: Buying A Business, How To Buy A Business, How To Sell A Business, Legal Topics, Selling A Business

Contributor:

Willliam Ziprick
Areas Served: LA, Orange Counties
Phone:  909-255-8353 Office, 509-951-7230 Cell
Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.





  Helpful Resources To Assist In Selling And Buying California Businesses
Helen Yoo, New Century Escrow - Escrow Services In Southern California

Helen Yoo at New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Brad Steinberg, Business Broker: Laundromat Specialist

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Shalonda Chappel: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

William F. Ziprick, Attorney: Legal Services For Buyers And Sellers

Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services In California

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.


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