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

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

Process Setting expectations • Often determined in conjunction with: • Retirement advisor • Investment advisor • Accountant • Legal counsel

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.)

Process Negotiating a Letter of Intent (LOI) or Memorandum of Understanding (MOU) • I mportance of a well done LOI/MOU: • Clarity of key deal terms • Avoid intractable negotiating positions • Non-binding • Exclusivity

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

Process

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

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

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

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

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

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

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

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

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

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

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

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

Structuring the Transaction Other Structuring Techniques/Issues • Personal Goodwill • What is it?

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

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

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

Structuring the Transaction Other Structuring Techniques/Issues Other techniques • • Statutory conversions before closing (see Case Study)

Structuring the Transaction Other Structuring Techniques/Issues Other techniques • • LLC drop downs o Allows for tax deferred rollover equity by Seller o Allows for buyer asset basis step up on non-rollover interests

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

Structuring the Transaction Other Structuring Techniques/Issues Other considerations • • Covenants not to compete • Consulting Agreements • Employment Agreements • Lease of real property

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

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

Other Issues

Other Issues • EIN retention issues and rules

Other Issues • Use of Section 1031 like-kind exchanges

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