Because a stock transaction oftentimes results in an ownership change, it may advantage the sellers to structure the transaction as an asset deal rather than a stock deal. Assuming you sold the stocks during the 2018 tax year, you'll pay tax at the capital gains rate, which for 2018 is also 15 percent, depending upon how much other taxable income you had for the year. A 338(g) election assumes that the target sold its assets at FMV, rather than its stock. Buyers and sellers should consider buy-side or sell-side due diligence to help determine the deal structure. It does not involve the sale of assets, and the target company remains in existence and intact after the transaction. Tax attributes do not carry over to the buyer in an asset transaction. They could be converted to cash and paid out over time (like a bonus that vests). “Hot assets” could be allocated to the selling members which change the characterization from capital gain to ordinary income and subject to tax at the partner’s marginal tax rate. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. The purchase price is then allocated first to Class I ($ for $) and to each succeeding asset class in ascending order to the extent of the FMV of the aggregate assets in each class. When an asset acquisition of an active trade or business occurs, IRS regulations require that the buyer and seller use the “residual method” to allocate the purchase price/sales price to the assets for purposes of determining the tax basis of the assets for the buyer and computing taxable gains for the seller. In 2018, total merger and acquisition global deal volume was $4.2 trillion, compared to the $3.7 trillion volume in 2017. Each shareholder will then pay tax on their share of the gains at their respective tax rates, which allows for some of the gains to be taxed at the lower capital gains rates of 25% or 15%, rather than the top individual or trust tax rate of 39.6%. While tax issues can get tricky, the big-picture difference between cash and stock deals is that when a seller receives cash, this is immediately taxable (i.e. However, when it comes to the tax consequences, a direct asset purchase generally is the better deal for the buyer, providing a big tax break unavailable in a stock purchase. A 338(h)(10) election is made jointly by the buyer and seller and is only available for certain transactions. No Section 338(h)(10) election is required. So the stock swap tax implications are little to none at the time of the merger or acquisition, but there may later be some stock swap tax consequences. Cash and stock merger tax treatments offer several ways for the exchanged stocks to be acquired tax free. The two corporations join to make the special election so the transaction becomes, in effect, an asset purchase deal for federal income tax purposes. Therefore, unforeseen tax consequences can result to a target company that is fixed asset-intensive and has taken advantage of bonus depreciation or fixed asset expensing under IRC Sections 168 or 179, respectively. The New York permit number is 64508. A stock sale takes place between the buyer and the target company’s shareholders. Stay up to date with monthly blog highlights, What to know about equity when you leave a company. Come tax time, the buyer takes the stepped-up tax basis advantage. NYSE and AMEX data is at least 20 minutes delayed. You generally need an appraisal to allocate the purchase price to the specific assets in order to establish their initial tax basis. Each member firm within the Nexia International network is a separate legal entity. If the transaction is structured as an acquisition of assets, the seller will recognize gain or loss on an asset-by-asset basis. What Is the Difference Between Preferred Stock & Regular Stock?→, The Difference Between Cash & Stock Mergers→, Shareholders Equity Vs. This election can be made under IRC Sections 338, 336, and 754, depending upon the type of entity involved and if other criteria are met. From the buyer’s perspective, the purchase price is allocated to the assets as discussed below, and the allocations become the buyer’s tax basis in the assets purchased. Cash This results in lower depreciation and amortization deductions, as well as higher taxable gain on subsequent sale of the assets, since the buyer’s basis is lower than when assets are purchased. Pave the Way for M&A Success: The Post-Merger Transition, Privacy policy, terms of use, and disclaimers The parties commonly model the tax consequences of both transactions and pursue the most favorable tax structure. With a stock purchase, the buyer generally becomes responsible for the target’s known and unknown liabilities once it takes legal ownership. Sellers need to carefully review situations where the target company has significant tax attributes and an asset sale is pursued. Since only assets are being purchased, the tax attributes of the target corporation do not carry over to the buyer. However, the gains that were recognized on the sale of the assets increase the shareholders’ stock basis, reducing their gain on liquidation, effectively eliminating the double taxation problem (as long as the built-in gains tax does not apply). Rules and Regulations for Liquidating Stocks, Income Tax: How to Figure the Price of Stock Sold. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. Intangibles other than goodwill and going concern value Mergers and acquisitions of financial institutions increased steadily throughout 2014 and 2015, and it looks like the trend is continuing into 2016. If you've held the old shares and the new shares for more than a year, the lower long-term tax rate applies to any gain on sale of the new shares. It is possible to structure a stock acquisition . In a stock transaction, these attributes generally carry over to the buyer for potential utilization in future years. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." Does Selling Stocks in an IRA Count as Income? Since most taxable acquisitions are structured as stock purchases without a Section 338 election, the buyer's outside basis in an acquired subsidiary usually exceeds its inside basis in that subsidiary (since the acquirer's basis in the target's stock would be stepped up for tax purposes, while the acquirer's basis in the target's assets would be carried over). It doesn't matter whether the shares are preferred, common or private; nor does it matter whether the trade was voluntary on your part or if you voted for it. The acquisition must be for at least 80% of the target’s stock, and the target must be either an S corporation or a subsidiary that filed with a consolidated group. However, Section 382 of the Internal Revenue Code can severely limit the amount of net operating losses and built-in losses of the target that can be used year-to-year by the buyer. 2021 Scenario Planning: Start-up Fundraising Part 2 — You Raised Money, What’s Next? In addition, the IRS treats the sale of 100 percent of the equity interests in an entity taxed as a partnership as a sale of partnership interests to the sellers (generally capital gain treatment with the exception of “hot assets”) and a purchase of assets to the buyer. Wherever you are in the negotiation process, consider the guidance of an experienced M&A tax professional to help ease the anxiety associated with M&A transactions. If you are still filing your 2018 taxes and you're wondering about the cash and stock merger tax treatment for that tax season, it's similar to every other year. How to Handle Restricted Stock 1099-B on a Tax Return. When that happens, the acquiring company can offer cash or other taxable consideration, which is called “boot.” Providing boot is only allowed in type “A” reorganizations, and includes consideration such as certain types of preferred stock or cash. Buyers may want to pursue an asset transaction when there is significant potential of undisclosed tax or nontax liabilities that the buyer does not want to assume.