Buying and Selling a Business Maine Tax Forum Augusta, Maine - - PowerPoint PPT Presentation

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Buying and Selling a Business Maine Tax Forum Augusta, Maine - - PowerPoint PPT Presentation

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Federal Tax Considerations for Buying and Selling a Business Maine Tax Forum Augusta, Maine November 5, 2015, 2015 Introduction Format Major considerations Process Structure Case Studies Process What is being

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Federal Tax Considerations for Buying and Selling a Business

Maine Tax Forum

Augusta, Maine

November 5, 2015, 2015

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Introduction

  • Format
  • Major considerations
  • Process
  • Structure
  • Case Studies
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SLIDE 3

Process

What is being sold/purchased?

  • Asset or equity purchase?
  • What type of entities are involved?
  • S/C Corporation
  • LLC/Partnership
  • Sole Proprietorship
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Process

Setting expectations

  • Often determined in conjunction with:
  • Retirement advisor
  • Investment advisor
  • Accountant
  • Legal counsel
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SLIDE 5

Process

Setting expectations

  • What does the seller need/expect to net in cash

(after tax)

  • Retirement income stream?
  • Debt repayments?
  • Other?
  • What does a buyer expect/need in tax benefits
  • Tax basis step up
  • Carryover of tax attributes (NOLs, credits etc.)
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Process

Negotiating a Letter of Intent (LOI) or Memorandum of Understanding (MOU)

  • Importance of a well done LOI/MOU:
  • Clarity of key deal terms
  • Avoid intractable negotiating positions
  • Non-binding
  • Exclusivity
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SLIDE 7

Process

Tax structuring

  • Projection of taxable gain (sellers)
  • Projection of tax benefits (buyers)
  • Use of flexible modeling to analyze alternative deal

structures

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SLIDE 8

Process

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Process

Due Diligence Review

  • Financial statements/books and records
  • Accounting systems
  • Tax returns
  • Liability exposure
  • Contracts
  • Employee matters
  • Intellectual property
  • Real property
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Process

Purchase and Sale Agreement

  • Tax representation review by accountants
  • Returns filed
  • Taxes paid
  • Adequate tax accruals
  • Deferred income
  • Entity classification
  • FIRPTA
  • 409A deferred compensation
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Process

Purchase and Sale Agreement

  • Tax covenants review
  • Who files what after closing
  • Who gets pre-closing tax refunds
  • Tax audits and contests for pre-closing periods
  • Post-closing elections
  • Cooperation
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Process

Purchase and Sale Agreement

  • Indemnification
  • Unqualified/unlimited tax indemnification
  • Hidden taxes such as Section 1374 gains
  • Identified tax issues
  • Specific tax escrows
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Process

Purchase and Sale Agreement

  • Post-closing reporting and tax elections
  • Purchase price allocation
  • Termination of S corporation year (Section 1377(a)(2))
  • Allocation of tax deduction arising at closing
  • Section 338(g) or 338(h)(10) elections
  • Section 754 election
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Process

Purchase and Sale Agreement

  • Purchase price allocations
  • Sections 1060 and 338
  • Agreement in writing
  • Or no agreement
  • Seven asset classification categories
  • Importance of allocation on buyer and seller
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Structuring the Transaction

Purchase/Sale of Equity Interests

  • Stock sale (C corporation)
  • All capital gain to seller
  • No inside basis step up for buyer
  • Double taxation often calls for more elaborate tax

planning and deal structuring

  • Section 338 elections
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Structuring the Transaction

Purchase/Sale of Equity Interests

  • Stock sale (S corporation)
  • All capital gain to sellers
  • No inside basis step up to buyer
  • Possible Section 338(h)(10) election
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Structuring the Transaction

Purchase/Sale of Equity Interests

  • Sale of partnership interests
  • Possible ordinary income to sellers (751 “hot

assets”)

  • Asset purchase treatment to single purchaser

acquiring 100% interests

  • Section 754 election to step up basis of assets in

continuing or technically terminated partnership

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Structuring the Transaction

Purchase/Sale of Assets

  • Determination of gain/loss
  • C corporation (double taxation)
  • Single rate of tax/no capital gain rate
  • Distributions of proceeds taxable to shareholders
  • S corporation or partnership or sole

proprietorship

  • Only one level of tax (except if Section 1374 applies)
  • Ordinary and capital gain rates may apply
  • Possible loss on liquidation of S corporation from

basis step up from sale gain

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Structuring the Transaction

Purchase/Sale of Assets

  • Characterization of gains
  • Ordinary versus capital gain
  • Section 1245 recapture
  • Section 1250 recapture
  • Unrecaptured section 1250 gain
  • Section 197 recapture
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Structuring the Transaction

Other Structuring Techniques/Issues

  • Installment Sales
  • Interest charges (453A and/or imputed)
  • Contingent sale amounts (treatment under regs)
  • Planning Trap!! Possible acceleration of deferred

gain on S corporation liquidation or deemed liquidation

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Structuring the Transaction

Other Structuring Techniques/Issues

  • Personal Goodwill
  • What is it?
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Structuring the Transaction

Other Structuring Techniques/Issues

  • Personal Goodwill
  • Personal versus enterprise goodwill
  • Identifying personal goodwill
  • Measurement techniques
  • Martin Ice Cream and other case law
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SLIDE 23

Structuring the Transaction

Other Structuring Techniques/Issues

  • Personal Goodwill
  • Other requirements to respect to personal goodwill
  • No employment agreement or non-compete before sale
  • Need for non-compete post-sale
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Structuring the Transaction

Other Structuring Techniques/Issues

  • Tax elections (corporations only)
  • Section 338(g) election
  • Section 338(h)(10) election
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Structuring the Transaction

Other Structuring Techniques/Issues

  • Other techniques
  • Statutory conversions before closing (see Case

Study)

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Structuring the Transaction

Other Structuring Techniques/Issues

  • Other techniques
  • LLC drop downs
  • Allows for tax deferred rollover equity by Seller
  • Allows for buyer asset basis step up on non-rollover

interests

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Structuring the Transaction

Other Structuring Techniques/Issues

  • Other techniques
  • Tax Free Mergers and Acquisitions
  • Section 368
  • Sections 351/721
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Structuring the Transaction

Other Structuring Techniques/Issues

  • Other considerations
  • Covenants not to compete
  • Consulting Agreements
  • Employment Agreements
  • Lease of real property
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Case Studies

#1 Sale of C corporation professional practice (including personal goodwill) Facts:

  • C corporation
  • Client lists most valuable asset
  • No employment contracts with principals
  • No non-compete agreements with principals
  • Hard assets of relatively nominal value
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Case Studies

#2 Sale of S corporation with preceding statutory conversion to LLC/partnership entity classification Facts:

  • Buyer not an eligible S corporation shareholder
  • Buyer needs basis step up
  • Cannot do as straight asset purchase because of

non-assignable contracts

  • Seller wants all capital gain
  • Buyer willing to provide a tax gross up
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Other Issues

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Other Issues

  • EIN retention issues and rules
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Other Issues

  • Use of Section 1031 like-kind exchanges
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Presenters

Robert B. Ravenelle JD, LLM, CPA rravenelle@pierceatwood.com Pierce Atwood LLP Merrill’s Wharf 254 Commercial Street Portland, ME 04101 PH / 207.791.1294 James Boulette CPA jamie@pfbf.com Reginald Perry CPA/ABV, MAFF, CVA reg@pfbf.com PFBF CPAs 46 FirstPark Drive Oakland, ME 04963 PH / 207.873-1603