Stock sale vs. Asset sale: Tax Considerations
Has the turmoil over the last year caused you to start thinking of selling your business? Or, perhaps, the pandemic has opened up opportunities to expand your business? One of the most compelling decisions you will need to consider in structuring a buy/sale agreement is whether to structure the deal as a stock transfer or an asset transfer. Often, the tax implications can cause the seller to favor a stock transaction, while the buyer usually prefers an asset transaction.
A stock sale results in the transfer of the ownership of the business entity, so the new owner continues with all of the assets and liabilities of the business. An asset sale results in the sale of all or part of the assets and liabilities (generally excluding long-term debt) of the business, which the new owner transfers to its own entity, or to a newly-created entity. Both options have advantages and disadvantages to the seller and buyer.
- Seller’s gain on sale of stock is taxed at lower capital gains rate.
- Title of assets remains with the entity, so there is no costly transfer of assets, permits, contracts.
- Buyer may have to accept certain contingent liabilities.
- Buyer can continue the depreciation on assets not already fully depreciated, but does not receive a step-up in basis.
- Buyer can step-up the basis of the assets to fair market value and re-depreciate them (including bonus depreciation). Buyer may have the opportunity to assign more of the purchase price to faster-depreciating assets and less of the price to slower-amortizing goodwill.
- Transfer of the title of certain assets – contracts, licenses, permits – may be costly and time-consuming.
- Buyer may be able to avoid accepting certain liabilities.
- Seller’s gain on sale of certain assets is taxed at higher ordinary income tax rates.
- If seller is a C corporation, the gain may be subject to double taxation.
For transactions involving sellers that are not C corporations, the parties can make an IRC Sec. 338(h)(10) election to treat a stock sale as an asset sale for tax purposes. This option allows the buyer to enjoy the depreciation deduction for the stepped-up assets, without incurring the cost or inconvenience of transferring the title of the assets. Often, the parties will negotiate an incentive to compensate the seller for the additional tax cost.
The sale or purchase of a business can be tedious and confusing. Barnes Dennig can help you get the best deal at the lowest tax cost. If you have questions about the stock or asset purchase or sale of your company, or need assistance with mergers, acquisitions, audit or accounting issues, Barnes Dennig can help! Visit our Transaction Advisory Services page, and for additional information call us at 513-241-8313 or click here to contact us. We look forward to speaking with you soon.