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MiMfg Magazine
May 2019
Making Smart Mergers and Acquisitions
under Today’s Tax Law
By Amy Buben • Yeo & Yeo CPAs and Business Consultants
Yeo & Yeo’s 2019 LEA National Manufacturing
Outlook Survey identified that more manufacturers
are considering mergers and acquisitions (M&A)
this year to keep their companies on track for growth.
Twenty-one percent expect to acquire another business
in 2019 and 16 percent are in the pre-planning stage
of a merger or acquisition. Before you jump on the
M&A bandwagon, it’s important to understand how
your transaction will be taxed under current tax law.
Stock vs. Asset Purchase
From a tax perspective, a deal can be structured
in two ways:
1. Stock (or ownership interest) purchase. A
buyer can directly purchase the seller’s ownership
interest if the target business is operated as a C or S
corporation, a partnership, or a limited liability
company (LLC.) This is called a “stock sale.”
The flat 21 percent corporate federal income
tax rate under the Tax Cuts and Jobs Act (TCJA)
makes buying the stock of a C corporation
somewhat more attractive because:
• The corporation will pay less tax and generate
more after-tax income, and
• Any built-in gains from appreciated corporate
assets will be taxed at a lower rate when they’re
eventually sold.
These considerations may justify a higher purchase
price if the deal is structured as a stock purchase.
Reduced individual federal tax rates as a result of
TCJA may also justify higher purchase prices for
ownership interests in pass-through entities because
the income from these entities will be taxed at lower
rates on the buyer’s personal tax returns.
2. Asset purchase. A buyer can purchase the
assets of the business, which is the only option if
the target business is a sole proprietorship or
single-member LLC (SMLLC) treated as a sole
proprietorship for tax purposes.
Important: In certain circumstances, a corporate
stock purchase can be treated as an asset purchase by
making a Section 338 election.
How does the TCJA Affect
Buyers and Sellers?
While the TCJA doesn’t change the buyer’s or
seller’s objectives, it may change how they achieve them.
Buyers typically prefer asset purchases
For legal and tax reasons, buyers usually prefer to
purchase business assets rather than ownership interests.
A straight asset purchase transaction generally protects
a buyer from exposure to undisclosed, unknown and
contingent liabilities. Expanded first-year depreciation
deductions under the TCJA make asset purchases
even more attractive, possibly warranting higher
prices if the deal is structured that way.
In contrast, when corporate stock is purchased,
the tax basis of the corporation’s assets generally
can’t be stepped up.
Sellers generally prefer stock sales.
Sellers want to minimize the tax hit from the
sale, which can usually be achieved by selling
ownership interest in the business (corporate stock
or partnership or LLC interest) as opposed to
selling the business assets.
Sellers have two main nontax objectives:
• Safeguarding against business-related liabilities
after the sale, and
• Collecting the full amount of the sales price if
the seller provides financing.
The Bottom Line
Buying or selling a business may be the most
important transaction of your lifetime, so it’s critical
to seek professional tax advice as you negotiate the
deal. After the deal is done, it may be too late to get
the best tax results.
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Amy Buben, CPA, CFE is a principal at Yeo & Yeo
CPAs & Business Consultants. She may be reached at
989-793-9830 or [email protected].