Buyers and sellers: tax strategies for buying and selling businesses.

• Author: Briskin, Robert
• Position: BUSINESS STRATEGIES

Among its many provisions, the Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces the tax costs of selling a business.

CPAs can maximize the tax benefits for their clients through careful tax structuring of the selling entity; transferring the selling entity's assets; and properly allocating the purchase price among sold assets, intangibles and employment agreements.

The following are some available tax strategies for buying and selling a business.

AVOIDING DOUBLE TAXATION

Many businesses that are sold are owned by C corporations, which produces two levels of taxation in an asset sale: first at the corporate level on the assets' sale and second at the shareholder level when the net sales proceeds are distributed to the shareholders in a corporate liquidation.

Even after the 2003 Tax Act's tax reductions, this double taxation of the purchase price paid to a C corp in an asset sale produces a 53 percent tax rate after taking into account the effect of California tax. This combined tax rate will increase after the federal capital gain rate increases to 20 percent in 2009. This current combined 53 percent rate on an assets' sale gain should be contrasted with a stock sale where the one level of tax on the gain produces a low combined 21 percent federal and California capital gain rate.

These tax rates assume that there is no federal individual alternative minimum tax, which is at a maximum 28 percent federal rate. Because of California's high income tax rates, many clients will be subject to the AMT where they have a large amount of taxable gain from the sale of their business.

Selling Shareholders Will Prefer to Sell Their C Corp Stock Instead of Doing an Asset Sale to Produce Only One Level of Taxation. To avoid two levels of taxation, C corp clients selling their businesses will want to have a stock sale and not an asset sale, since a stock sale produces only a shareholder-level tax at low capital gain rates. However, the business' buyer may desire an asset sale to receive a stepped-up tax basis in the acquired assets. An asset sale also allows the buyer to avoid being obligated for potential tort and contract liabilities of the selling corporation. Additionally, an asset sale may have a California sales and use tax imposed on the sold assets.

The corporate buyer of stock could make a Sec. 338 election to receive a step up in the selling corporation's assets' tax basis, but the buyer would then have to pay a corporate-level income...