by Rick J. Taylor
It’s not unusual for manufacturers to find themselves on either side of a purchasing table—either acquiring a business or selling one. It’s also not unusual for such organizations to be so laser-focused on defining the terms of the deal and gaining consensus that they neglect to address the tax consequences until agreements are well underway.
Unfortunately, that’s too late.
Once the deal has progressed to this point, minimizing the tax consequences of the transaction may be impossible without unraveling many of the hard-fought terms. It can also mean missing out on potential benefits.
Waiting until the financial terms of the deal are decided before involving tax professionals results in some very costly mistakes—mistakes that can increase the real cost of buying a business by up to 35 percent and reduce the benefit from selling a business by up to 45 percent! Such oversights are generally to the advantage of the opposing party—and always benefit the IRS.
To truly maintain the balance of power in any negotiation and avoid costly miscalculations, you’ll want to know how tax laws impact various aspects of the deal. By bringing on tax expertise early in the transaction, you can avoid the many upfront structural mistakes that often throw a deal into shambles much later on in the game.
Here are the top 10 questions, related to tax considerations, you should address at the start of any acquisition or divestiture of a business.
- Has the proposed purchase price been specified for assets rather than for stock? This can potentially increase the cost to the buyer and decrease the net after-tax cash to the seller.
- Will there be a special interest charge? The IRS imposes a charge on installment sales in excess of $5 million. While not impacting the buyer, it can significantly increase the tax cost of a sale.
- Before the final price has been established, is there agreement on an allocation of purchase price to various asset classes? This potentially jeopardizes future amortization deductions for federal and state tax purposes.
- Have state taxes been considered? State taxes can have a negative impact on presale tax planning, particularly for those entities that plan to move to no-tax states prior to the sale.
- Can this deal be structured as a tax-free reorganization? It’s a possibility, despite either company being publicly traded.
- Can this acquisition be structured, in whole or in part, as a tax-free, like-kind exchange?
- Did the previous purchaser overpay for assets or a liquidated subsidiary? This may tip the scales in favor of a stock, rather than an asset, purchase.
- Does the acquired business have tax attributes that are carrying forward? Specific limitations apply to the subsequent use of net operating losses and other tax attributes.
- Does the business operate as a C corporation? A double-tax regime applies to regular C corporations, which generally reduces the price a buyer is willing to pay for the business by up to 45 percent.
- Is the real estate part of the purchase? Many buyers refuse to include it. It’s generally impossible to take appreciated real estate out of either a C or an S corporation without incurring significant negative tax consequences, making this a possible deal breaker.
Knowledge is power
No matter what side of the purchase a manufacturer may be on, it’s crucial to enter negotiations with an understanding of how federal and state tax laws will impact the deal. With the help of a tax professional right from the start, you can determine the real costs and avoid costly mistakes that derail the deal.
About the Author
Rick J. Taylor, CPA, is a Wipfli partner who provides specialized expertise and helps clients determine how best to organize and operate their businesses, which accounting methods will generate the best tax results, how to structure business acquisitions and combinations, how to spin off or liquidate existing businesses, and how to optimize the benefits of operating as a pass-through entity. To learn more about how tax planning can help you structure a business purchase or sale, please contact Rick at rtaylor@wipfli.com.