Tax Services M&A Activity on the Horizon? Tax Impact of Stock Versus Asset Purchase
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Throughout 2019, taxpayers and tax practitioners have seen an increase in merger and acquisition activity due, in part, to increased cash flow benefits that companies have received as a result of 2017 tax reform efforts. As companies continue to engage in this type of activity, one of the most important questions to consider is: “What is the most tax-efficient way to structure this transaction?”

While the tax consequences of a transaction should not be the main consideration when contemplating a merger or acquisition, they should be at the forefront when making decisions in the merger and acquisition space.

In general, a merger or acquisition is the consolidation of business entities or assets either by combining two business entities or by the transfer of one entity’s assets to another. These transactions can be structured in various ways, including a variety of tax-free structures, but two of the more common avenues are stock purchases and asset purchases.

  1. Stock Purchase – A buyer can purchase the seller’s ownership interest in the targeted business.
  2. Asset Purchase – A buyer can purchase the seller’s business assets while the seller remains the legal owner of the entity.

Both tax and non-tax implications should be considered when contemplating a transaction. Unlike other types of merger and acquisition activity, both stock and asset purchases are generally taxable transactions. The advantages and disadvantages of each type of transaction, both tax and non-tax, are highlighted in the tables below.

Stock Purchase

Advantages

Disadvantages

No revaluations or retitling of assets

No step-up in basis of assets to fair market value

Ease of administrative process

Assets and liabilities transfer at carrying value

No state sales or transfer taxes on assets

No hand-picking of assets & liabilities

Seamless transfer of contracts, permits

Unknown liabilities

Seamless transfer of employees

Goodwill is not amortizable

No corporate level gain

Shareholders may not wish to enter transaction

Asset Purchase

Advantages

Disadvantages

Step-up in basis of assets to fair market value

Tax cost to seller is generally higher

Depreciation deductions on assets with a stepped-up basis

Assets need to be retitled

Amortization deductions on assets with a stepped-up basis

Contracts may require renegotiation under new owner

Amortization of goodwill is allowed

Potential sales tax on certain fixed assets

Buyer can hand-pick assets & liabilities

 

Stock purchases are usually preferred by the target company since the target company remains intact after the transaction. Asset purchases are preferred by the purchasing company since there are greater tax benefits to the purchaser.

M&A transactions are definitely not one size fits all, and they require careful consideration by each party. If you are anticipating upcoming merger and acquisition activity or need advice on how best to structure your next transaction, reach out to P&N for help navigating your options.

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