Looking to sell your corporation, but don’t know if you should sell the stock or the assets? The difference between the two may not appear large, but there may be disproportionate tax consequences.
The acquisition of a corporation generally takes shape in one of two forms: either the purchaser acquires the underlying assets of the target corporation, or they acquire the stock.
When the acquiring corporation purchases the assets of the target corporation, various tax effects are realized by the seller and the buyer. The target corporation must recognize gain or loss on the assets sold to the purchaser, subjecting itself to corporate level tax. When the target corporation passes out the proceeds to the shareholders of the target corporation, the shareholders will then pay tax if there is any gain on their stock, thus subjecting the shareholders to double taxation. For this reason, asset sales tend to be less beneficial for the target corporation shareholders. On the flip side, asset purchases are usually more beneficial for the purchasing corporation. Because the assets are being sold, it allows for a step-up in basis which allows the purchasing corporation to depreciate the full purchase price of those assets, thus reducing the corporation’s tax.
When the purchaser acquires all of the target’s stock, the purchaser is buying out all of the existing shareholders of the target corporation. The shareholders of the target corporation will recognize gain or loss on the sale of their stock. The purchaser will continue the operations of the target corporation, and the target corporation will generally not be subject to entity level tax. Stock sales are usually preferable to asset sales for the shareholders of the target corporation because all of the proceeds are typically taxed at the lower capital gains rates and any corporate level taxes are bypassed. The purchaser also acquires all of the liabilities of the target corporation in the sale, making the target corporation shareholders less likely to be responsible to creditors. For the purchaser, they receive carry over basis for the target’s assets which means that they will be responsible for the taxes on any gain on the sale of those assets and will not receive a step up in basis.
When a corporation acquires another corporation by purchasing its stock, they may want to consider the tax benefits of making a Section 338(h)(10) election to treat the stock acquisition as an asset acquisition.
When a Section 338 (h)(10) election is made to treat a stock acquisition as an asset acquisition, the acquiring corporation gets a stepped-up basis in the target corporation’s assets. And although the target corporation generally must recognize any gain inherent in its assets at the time of the acquisition, its loss carryovers may be utilized to offset that gain.
A Section 338(h)(10) election may only be made if the acquiring corporation purchases at least 80 percent of the total voting power and total value of the stock of the target corporation within a 12-month period, beginning on the date of the first purchase of the target corporation’s stock.
If you have any questions or need help determining the best route to sell your corporation, please contact your L&B Professional at 858-558-9200.