Tax implications of a business sale are real and significantly impactful. Often the pain of the business sale on the capital gains tax can kill a deal. One of the ways to bridge that gap is the Section 338(h) if the IRS code. In simple layman’s terms…..you do a stock sale but recognize it on the buy side as an asset sale. It can often create the most favorable result for both parties. Your CPA and Attorneys need to be educated on it and your particular case may hinder or make the execution ideal.
Look at this way in advance with your exit team to make this a viable option when the time comes to exit.
Section 338(h)(10) and Section 336(e) of the Internal Revenue Code (IRC) are provisions that allow for certain tax treatment in the context of corporate acquisitions or reorganizations.
Section 338(h)(10) allows a purchasing corporation to elect to treat the acquisition of another corporation as a deemed asset purchase for tax purposes, even though it may legally be structured as a stock purchase. This means that the purchasing corporation can treat the transaction as if it had acquired the assets of the target corporation, resulting in potential tax benefits such as stepped-up basis in the assets and the ability to deduct any resulting goodwill or intangible asset amortization.
Section 336(e) provides a similar tax treatment, but in the context of certain liquidations, where the selling corporation is liquidating and distributing its assets to its shareholders. Under Section 336(e), the selling corporation can make an election to treat the liquidation as a deemed sale of assets, allowing for the recognition of gain or loss at the corporate level instead of the shareholder level.
Both provisions are commonly used in mergers, acquisitions, and reorganizations to achieve specific tax outcomes. It’s important to note that these provisions can be complex, and their application may depend on various factors and specific circumstances. Therefore, it’s recommended to consult with a tax professional or attorney for specific advice related to your situation.
For more on buying and selling a business contact Tampa Business Broker Michael Shea at 321-287-0349 or email him at mike@tworld.com .