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TAX MIN INIMIZATION IN IN MERGERS & ACQUISITIONS Harold F. - - PowerPoint PPT Presentation
TAX MIN INIMIZATION IN IN MERGERS & ACQUISITIONS Harold F. - - PowerPoint PPT Presentation
TAX MIN INIMIZATION IN IN MERGERS & ACQUISITIONS Harold F. Ingersoll, CPA/ABV/CFF, CVA, CM&AA Stock/Interest Asset Reason is to transfer non- assignable contracts and liabilities Can be treated like an asset deal, Sec. 338
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Reason is to transfer non- assignable contracts and liabilities
Can be treated like an asset deal, Sec. 338 (h)(10) for C Corps and Sec. 336(e) for S Corps.
- If election is made, then options are the same
as the asset deal. (Discussed later.)
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C Corporations Only
Avoid taxes using Sec. 1202
If Qualifying Small Business Stock (QSBS) Exclusion of gain up to $10m. Some reductions if original stock purchased before 2/17/2009. QSBS must have always been taxed as a C Corporation (could never have been anything else). Stock held must be original issue stock. Assets cannot exceed $50m. Must hold original stock for 5 years or more.
De Defer taxes using Sec. 1045 If Qualifying Small Business Stock (QSBS) Unlimited amount of gain can be deferred. Must be rolled over into another QSBS within 60 days of sale. Must have held the QSBS only 6 months prior to sale.
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All Corporations (C&S)
Defer taxes
- Reorganization/Mergers:
- Forward or reverse triangular mergers
- Other merger types
- If outright sale by individual, profit is capital gains
- ( Usually no Texas Franchise taxes )
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Partnerships and LLCs
In Interest sale le Capital gains to selling partners on all except Hot Assets. Hot assets are primarily accounts receivable and inventory, these may be taxed as ordinary income. Taxes can be deferred if Section 721 is used.
- ( Usually no Texas Franchise taxes )
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Reason is to leave seller liabilities with the seller. Usually, all assets (except cash) and potentially accounts receivable & accounts payable. Buyer may assume some specific liabilities. Gain taxation depends on allocation of purchase price to specific asset classes. Type of entity makes a huge difference.
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C Corporations
All gains recognized are taxed at ordinary income tax rates regardless of
the character (capital/ordinary).
To get funds out of the corporation, the shareholders receive a bonus
- r taxable dividend. If the gains are too large, bonuses become difficult
due to reasonable compensation issues. If dividend, it is double taxed. Maximum rate at corporation is 35%, then at individual level is 23.8%, total maximum rate of 58.8% if paid out as dividend.
If there is significant personal goodwill owned by the selling
shareholder which can be justified, the buyer can purchase the personal goodwill directly from the seller. This creates capital gains for the seller outside of the corporation that are taxed at maximum rate of 23.8%.
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S Corporations & Partnerships
Gains depend on how the purchase price is allocated:
Seller motivated to allocate more to intangibles, such as goodwill,
which will be taxed as capital gains.
Buyer motivated to allocate as much to tangible assets (furniture,
equipment, etc…) as possible to get quicker tax write off. Good news is even intangibles get the tax benefit. It just takes 15 years to get the benefit.
If proceeds need to be allocated disproportionately or contrary to
allocation protocol, they can be directed outside of the entity directly to the owners for their personal goodwill, if it can be
- justified. Taxes are the same, but are proceeds are directed to
different owners.
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C CORPORATION:
Gain $1,000,000
Corporate tax None
Individual tax:
If §1202 None on potentially first $10m
If §1045 Potentially none
If neither $238,000
S CORPORATION:
Gain $1,000,000
Corporate tax None
Individual tax:
If merger None on amount swapped for buyer stock
If neither $238,000 (Does not take AMT into consideration)
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PARTNERSHIP:
Gain
$1,000,000
Individual tax:
If merger
None on amount swapped for buyer int.
If neither
$238,000
(Does not take AMT into consideration)
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C CORPORATION:
Gain $1,000,000
Corporate tax:
Franchise tax $ 7,500
Income tax $ 350,000
Individual tax:
If dividend paid of $650k $ 154,000
Total taxes $ 511,500
S CORPORATION:
Gain $1,000,000
Corporate :
Texas Franchise Tax $ 7,500
Income tax None (if never been a C corp)
Individual tax: $ 238,000
Total taxes $ 245,500
(Does not take AMT into consideration)
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PARTNERSHIP:
Gain
$1,000,000
Franchise tax
$ 7,500
Individual tax:
$ 238,000
Total taxes
$ 245,500
(Does not take AMT into consideration)
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- 1. If entity is a C Corporation consult with someone about the
qualification for Sec. 1202 and 1045 to see if qualified.
If so, consider the possibilities of a stock deal in a future sale. If a stock deal is not likely, then consider making an S election. If S election made, in 5 years the gain on any sale will be taxed as an asset
deal from an S corporation, avoiding double tax on all gains in excess of remaining C Corporation Earnings and Profits.
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- 2. When structuring a new business consider the possible exit
strategies before selecting an entity type.
If likely to be a stock/interest deal, then consider being a C Corporation from
the start so as to qualify for Sec. 1202 and 1045.
If more likely to be an asset deal then consider S Corporation or
Partnership/LLC structure.
Partnership/LLC offers more flexibility in ownership structure than an S
Corporation.
Venture capital, angel and private equity investors are becoming more
accepting of pass through entities in acquisitions.
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- 3. When structuring ownership of intellectual property, goodwill, real estate, and other
tangible assets, plan the most effective manner of holding the property.
Will IP
IP be be held in in a separate entity and then licensed to to the operating entity and a royalty be be paid? This way IP can be licensed to others without impairing the value of the operating entity
- r the IP.
Will the company execute non-compete agreements with the shareholder/employees? If so,
they are creating more value for the company, but reducing the possibility of allocating purchase price to personal goodwill of the owners, thus minimizing tax planning opportunities in structuring a future deal.
Will real estate owned by
by the company be be attractive to to a potential buyer? If potentially not, consider placing in a separate entity and charge rent to the operating entity. This will facilitate the better possibility of negotiating a stock or interest deal when sale time comes.
Will equipment or
- r other fi
fixed assets be be owned by by the company or
- r a separate company and
leased back to to the operating company? This may be attractive to segregate liability associated with heavy equipment and may facilitate a stock/interest deal in the future for a buyer that does not want the equipment.
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This is a very complicated area of the law and
requires knowing the market place in which the company is operating and planning for it. The market changes continually, so the planning needs to change also.
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Many of the issues discussed in this
presentation have significant legal impact in addition to income tax impact. I am not an attorney and any discussion of liability or legal structure issues need to be discussed with an attorney prior to decision making.
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Any EASY questions?
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