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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...

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]...

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...

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...

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...

You may hear your tax advisor talk about earnings and profits. Why is it important to compute earnings and profits? The answer is: this calculation allows a business to determine whether a distribution paid to shareholders would be treated as a taxable dividend, a nontaxable return of capital, or capital gain. A distribution is only a dividend if it exceeds current year E&P and/or accumulated E&P after 1913.   Amounts exceeding such E&P will be a...

The following article will explain what constitutes a distribution. To learn more about the different kinds of distributions, read The Impact of Distributions on Corporations. From a tax perspective, distributions may be viewed in one of three possible ways: dividends, return of capital, and gain.  Generally, distributions are dividends only to the extent that they do not exceed the corporation’s earnings and profits (E&P). Specifically, according to Section 301 of...

Introduction: A Few Key Differences in California Taxation Perhaps you’ve heard about the benefits of structuring your entity as an S- corporation after reading one of our articles or elsewhere. As we mentioned in “S corporations: Advantages and Disadvantages,” one of the main advantages of structuring as an S-corporation is that it is a flow-through entity for federal income taxation purposes. This means that the taxation “flows through,” or bypasses the entity level to...

A withholding tax is an amount of income that a company withholds from an employee’s paycheck or from dividends paid to a foreign shareholder. The corporation pays the money withheld to the IRS directly, instead of to the employee or shareholder. This article will be limited to taxes withheld on nonresident investors’ dividends. For an overview of the different components of a distribution, including dividends, return of capital, and capital gains, read The ABC’s of...

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