Owners naturally focus on price. The number that matters more is what reaches them after tax, and the same headline price can produce quite different results depending on what is sold, how the price is allocated and when it is paid. Much of that is negotiable early in a deal, which is the best time to look at it.
First, who is selling what
A buyer can purchase the company’s assets, or purchase the owners’ shares or partnership interests. For tax, those are different transactions. When an S corporation or partnership sells its assets, the gain flows through to the owners on their Schedules K-1, the forms that report each owner’s share of the company’s income. When the owners sell their own interests, each owner’s gain depends on that owner’s basis, and a partner selling a partnership interest can still have ordinary income from certain items inside the business, such as receivables and depreciated equipment.
For a C corporation, the difference is sharper. An asset sale can be taxed once at the company level and again when the proceeds reach the shareholders, which is one reason structure is the first question in any sale.
- Entity type and tax classification
- Asset basis, depreciation and liabilities
- Returns, notices, carryforwards and elections
- Purchase-price allocation among the assets sold
- Final or short-period returns after closing
- Basis, capital account and holding period
- State of residence and filing obligations
- Share of the company’s gain, reported on a K-1
- Estimated payments for the quarter of the sale
- Installments, earnouts and escrow in later years
Closing: one asset sale, reported on the company’s return and on each owner’s.
Price versus proceeds
Picture a $10 million sale of a pass-through company’s assets. How the buyer and seller divide that price among equipment, inventory, real estate and goodwill determines how much is taxed at ordinary rates instead of capital gains rates, and depreciation already taken on equipment generally comes back as ordinary income.
Deferred cash does not always mean deferred tax. When part of the price is paid over several years, depreciation recapture is still generally taxed in the year of sale. Add an escrow holdback, an earnout and state taxes, and two offers with the same headline can leave the owners with meaningfully different amounts, arriving at different times.
The company’s history travels with it
In a stock sale, the buyer generally takes on the company’s tax history, so buyers look closely at returns, notices and state registrations. An asset purchase usually leaves that history with the seller, with exceptions. In California, a buyer of a business can become responsible for the seller’s unpaid sales and use tax unless the buyer withholds enough of the price or obtains a tax clearance certificate. Reviewing the company’s filings before a buyer does lets the owners settle open items on their own schedule.
Where we help
We compare the tax consequences of the proposed terms for the company and for each owner, and show how they affect expected proceeds and the timing of tax payments. Owners are rarely identical: one may hold through a trust, another may live in a different state, and each has a different basis. Deal counsel negotiates the documents and valuation professionals support the price; our part is to show everyone at the table what each term means after tax.
Sources
- IRS Publication 544, Sales and Other Dispositions of Assets ↗
- IRS Publication 541, Partnerships ↗
- 26 U.S.C. § 751, Unrealized receivables and inventory items ↗
- IRS, About Form 8594, Asset Acquisition Statement ↗
- 26 U.S.C. § 453, Installment method and the recapture income rule ↗
- California Revenue and Taxation Code § 6811 (purchaser withholding on the sale of a business) ↗
Talk to us while the terms are open.
Tell us what you are considering and when a decision is expected. We can talk through the tax questions for the company and its owners and what we would need to begin.
Contact our team