FIRPTA Traps – Greenfield Projects and Start-up Businesses
By now, most foreign investors that are investing in US real property or US infrastructure projects have likely encountered the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). In general, FIRPTA was enacted to impose a tax on gains derived by foreign persons on the disposition of US real property interests (“USRPI”). Included in the definition of a USRPI is a US real property holding company (“USRPHC”), which is a corporation whose assets consist of more...
What is FIRPTA? A Guide for Buyers and Sellers in M&A Deals
What is FIRPTA? The Foreign Investment in Real Property Tax Act (FIRPTA) is a tax law that enables the IRS to tax non-US persons on their dispositions of U.S. Real Property Interests (USRPI). Understanding the application of FIRPTA is critical in conducting tax due diligence of Target companies, as the application of FIRPTA can have a significant impact on the after-tax IRR of a potential acquirer’s bid model, as well as create additional complications when...
Profits Interests vs Options – To Do or Not to Do?
Granting employees equity interests helps keep employees and key executives invested—both financially and emotionally—in the business, thereby incentivizing employees and encouraging employee retention. For startups and small businesses that are low on cash, granting equity interests is also a way to compensate employees, recruit new talent, or give current employees a raise without dipping into the current year’s cash reserves. Equity compensation is a broad category that...
Section 338(h)(10) Election – The Unicorn of M&A
Perhaps you’re the owner of a medium-large corporation and you’re looking to buy a smaller corporation or even a unicorn. And by unicorn, I don’t mean the mythical beast, but rather the mythical startup. Today we’ll talk about another kind of unicorn, one entirely different than an elusive $1 billion startup. The (unofficial) unicorn of the tax world might just be the magical 338(h)(10) election. Section 338(h)(10) Election Scenario 1 ...
The How To Guide to M&A: Shareholder Loans
This article will provide a brief overview of what a shareholder loan is, and the difference between equity and debt as two types of loans. Next, the tax consequences to corporations of shareholders’ interest on loans will be discussed. The last section will mention a few of the impacts that shareholder loans can have on target and acquiring companies as they undergo the process of a merger or acquisition. What is a shareholder loan?...
Purchase Price Allocation for Tax Purposes
When purchasing a business in an asset deal, the consideration is often expressed as a lump sum. However, in order to determine the tax basis of the individual assets comprising the business, a purchase price allocation would be necessary. The buyer would need to know how much of the purchase price is allocated to each asset in order to take calculate appropriate tax depreciation and amortization deduction. The seller is also interested in the purchase price allocation...
Reverse Triangular Merger: The Taxable and Tax-Free Version
This article will introduce the two variations of the reverse triangular merger: the taxable version (commonly reversed to as the reverse triangular cash merger) and the tax-free version. We will also discuss the tax considerations that accompany these two types of mergers. In both scenarios, the transaction would involve the creation of a new subsidiary. On the surface, it might appear that the introduction of a new entity merely creates more administrative and other...
Disregarded Entities – What Are They? – Pros & Cons in M&A
If an entity is considered to be a “disregarded entity” (DRE), the US IRS will not tax it as an entity separate from its owner. It is a pure tax fiction that has no parallel in the legal world. While there are several different entities that can become a disregarded entity, this article will primarily focus on the benefits of structuring a limited liability company (LLC) as a disregarded entity and how this decision impacts mergers and acquisitions. [1] Under...
Asset Sale vs Stock Sale – A Comparison Between The Two
This article will discuss two different types of acquisitions: asset sale vs stock sale. Perhaps your company is in talks with another company who is looking to buy or sell. How should your company approach the sale? The answer is: it depends on your goals as a buyer or a seller. There are a number of other more complex types of mergers, such as Reverse Cash Subsidiary Mergers, but asset and stock deals are among the most straightforward acquisitions. An asset sale occurs...
To Do or Not to Do: Profits Interests or Options?
Granting employees equity interests helps keep employees and key executives invested—both financially and emotionally—in the business, thereby incentivizing employees and encouraging employee retention. For startups and small businesses that are low on cash, granting equity interests is also a way to compensate employees, recruit new talent, or give current employees a raise without dipping into the current year’s cash reserves. Equity compensation is a broad...