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

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.

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.

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.

Janet Carrera: Escrow & Bulk Sale Service - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

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.

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.

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.


  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
What Should I Do If Other Buyers Are Trying To Buy The Same Business As Me?

Buying a small business is hard enough when there is no competition, so how might a buyer navigate the process when there is additional competition from other buyers? Potential small business buyers are offered a few key ways that a buyer can beat out other potential business buyers in this article.

If You Plan To Offer Seller Financing: 3 Things Owner Sellers Need to Know

When selling your business, offering seller financing is a great way to help your business standout from others on the market and it is also a good strategy to consider that can help you close a sale. Peter Siegel, MBA (BizBen ProSel Program & Financing Expert) explains. Reach him at 925-785-3118.

What Factors Are Considered In Valuing A Small Business? Advisors Weigh In

Valuing a small business is not guess work. It's not what some other businesses of the same type may have or may not have been sold for, it's not even what a business owner "feels" they want or deserve. It is a formula based on many factors. Peter Siegel, MBA from BizBen & others discuss this topic.

Computing All Add Backs: Defining Adjusted Net Income When Buying A Business

The use of add backs & adjusted net income is common among sellers of businesses when showing their financial information/performance. But buyers are cautioned to review financials and tax returns/documents closely. Peter Siegel, MBA with BizBen (ProBuy & ProSell Advisor, Lead Facilitator) explains.

Selling Your Business To One Of Your Employees - A Good Idea? Pros And Con

After investing years of time and talent into a company, many small business owners want to feel like they are leaving their business in good hands and for that reason, some sellers opt to sell their business to an employee. Peter Siegel, MBA talks about the pros and cons to taking this route.

Buying A Small Business That Is Not For Sale - Strategies For Business Buyer

Approaching business owners directly to see if they want to sell can sometimes work well for business buyers searching to buy a business. Another way is to broadcast your search criteria via the BizBen ProBuy Program to all brokers, agents, and intermediaries who sell businesses in California.

Absentee Run Small Businesses - Is That Really A Possibility For Buyers?

Is buying a absentee run small business really a possibility? Peter Siegel (BizBen ProBuy Director) gets asked this question a lot in his consulting sessions with business buyers. Read more about what other Advisors and Intermediaries feel about this topic on this popular BizBen Discussion!

Selling A Business Without Getting Sued: 5 Tips For Business Sellers/Brokers

How do I sell my business without getting sued, isn't a subject just for discussions with lawyers. A seller can take some precautions to reduce potential legal problems. Peter Siegel, MBA Founder Of BizBen and BizBen's ProSell Program discusses this topic for business owners/sellers and brokers.


Escrow Services Diane Boudreau-Tschetter
Steve Erlinger Laundromat Broker
Veld Group Business Brokerage Los Angeles County
Larry Larsen Laundromat Broker
Facebook
Twitter
Linkedin
Vlogs and Podcasts
BizBen ProBuy Program
BizBen Blogs And Articles
BizBen ProSell Program
Instant Email Alerts On BizBen
New Postings Reports On BizBen Sign Up



Clost Login


Please confirm your registration by clicking the link we've sent to .

If you can't see it, please check your junk mail folder.

If you have any problems registering, or need assistance with your new BizBen User Account please phone BizBen Customer Support at 888-212-4747.



First Name:*
Last Name:*
Email Address:*
Confirm Email:*
Create Password:*
Confirm Password:*
Phone:
(   
 


You Are A:
Individual
 
Intermediary
 

Email Address:
Password:
 

500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
Buy A Business Or Start From Scratch? 5 Key Differences For Business Buy...
Read More News
Financing A Business Purchase With Limited Or No Real Estate Collateral
Read More News