Selling or buying a business requires effective tax planning –indeed, the tax implications of the transaction can be one of the biggest factors that needs to be taken into account. Unfortunately, the complexities of the tax codes mean that often the tax consequences of your transaction –whether you are selling a business or buying one –can be misunderstood.
You will want to start considering your tax situation early into the sale process –it can have a significant effect on negotiations, for example –so that as the buyer you are mitigating as much of the tax costs as possible, and as the seller, you have a better understanding of your final net income from the sale.
Starting early also gives you the best opportunity to structure the transaction in such a way that your tax liabilities are minimized. There are two commonly used tax structures for business transactions: asset purchase and stock purchase.
This is where the buyer purchases the assets of the business itself –i.e., buildings, equipment, stock, etc. The individual assets are then allocated a purchase price, which becomes the initial tax basis for that asset. This means that you can reduce your tax liability by allowing for depreciation of individual assets –although if you then sell the asset you may be subject to a tax on the gain if it is sold for more than the current tax basis.
A stock purchase is where the buyer purchases the ownership of the company from the seller. This is usually preferable for the seller when it comes to the tax implications, as any gains from the transaction will be assessed as capital gains for federal taxation purposes.
SALT, or state and local taxes, add further complexity to the tax consequences –each state and jurisdiction has different regulations and requirements from M & A activity, including sales tax, excise tax, gross receipt tax, registration fees, and licensing fees. These considerations will also be affected by whether you are conducting a stock or asset purchase, with different exemptions available in different localities.
As part of the due diligence conducted by the buyer, any outstanding tax liabilities should be uncovered and built into negotiations and the ultimate transaction cost –tax debts stay with the company, so if the buyer takes over an organization with debts then they will have to pay them, not the seller.
Pinnacle Pharmacy Group
At Pinnacle Pharmacy Group, we focus on mergers and acquisitions activity specifically in the pharmacy business and digital health sectors. This gives us an enviable knowledge of the industry and positions us as a leader in managing transaction activity for both buyers and sellers.