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...
Earn Out Tax Treatment: Compensation Expense or Purchase Price?
An earn-out is an option sometimes used in an acquisition agreement that requires the buyer of a company to pay the seller additional compensation if the company achieves specified financial or operational goals, or meets other milestones by an agreed upon future date. Earn-outs are often used to bridge the gap between the buyer and seller when neither side can agree on a purchase price. There are a number of other reasons either side might want to agree to an earn-out...
Due Diligence Minefield: How to Check S Corporation Status
Introduction: A Second Class of Stock Isn’t Kosher If you’ve already read “S corporations: Advantages and Disadvantages,” you may be wondering why we’re talking about S-corporations and classes of stock. As you may recall, the requirements determining eligibility for S-corporation status are rather strict. One of the requirements that can cause negative consequences for the unwary taxpayer is the requirement that S- corporations solely distribute a single class of stock.[1]...
How Check The Box Elections Impact Your Tax Returns – Buyers’ Beware
What are Check the Box Elections When an entity is newly created, it is given a default classification for federal tax purposes. Our article on choice of entity gives an overview of the different types of entity classifications that business owners may select. Unless the entity is organized as a corporation (in which case it may not change its entity classification status), a newly created entity can elect to change its default classification by filing Form 8832 (Entity...
Alphabet Soup – When S Corporations Meet F Reorganization
In M&A deals involving S corporations, it has become popular to engage in pre-transaction restructuring by making use of an ”F” Reorganization. This provides the opportunity for the parties to receive the tax benefits provided by a purchase with a Section 338(h)(10) election without having to go through the election which has a number of requirements that may not be easily met. The F reorganization also allows the target company to continue to use the same employer...
Payroll Tax Savings in the M&A World and 2021 Refund Potential
During any merger, acquisition, or internal reorganization there are myriad corporate considerations on the tax and non-tax front. Besides all the internal resources utilized, there are usually attorneys, accountants, and outside consultants engaged to help the organization overcome the numerous hurdles it will encounter as it makes its way through the acquisition/transition process. However, there is one department that is often left out of the internal planning stages of...