Stock Sale of a C-Corp
When selling a C-Corp as an asset sale, those assets are compared to their depreciated basis and the difference becomes ordinary income.
The ordinary income in a C-Corp asset sale is often driven to the maximum 34% corporate tax.
As if this was not enough, the corporation pays the 34% tax bill and distributes the remaining assets to the shareholders.
The shareholders are then taxed at their long-term capital gains rate.
In a C-Corp stock sale, the stock is sold without taxation to the corporation.
The shareholders pay long-term gains only on the difference between their share of the distribution and the basis of the stock.
Buyers, however, often prefer the asset sale for their own reasons.
When purchasing the C-Corp as a stock sale, they not only inherit the corporation's assets, but any hidden liabilities as well.
Then, there is the fact that the buyer in such sale may get to step up the basis of all the assets and depreciate them at a higher rate than the current depreciation schedule allows.
As the seller, you might want to attempt to dissuade the buyer from an asset sale by offering a much higher price for the sale as compared to a stock sale.
You would explain this is necessary because of the punishing double taxation of such sale.
You might also agree to stringent warranties and a 10% to 15% escrow against any unforeseen liabilities.
This is still a much better option than the 34% loss of transaction value an asset sale would cost you.
If you have a sale that is heavily weighted in intellectual property and good will versus depreciable assets, step up in basis becomes less of an issue because the amortization schedule for goodwill is generally the same in both types of sales.
The thing is that you will have to be a savvy negotiator if you have an informed buyer.
The buyer knows that the asset sale greatly benefits them, while the stock sale is best for you.
There are terms you can negotiate to help offset this disparity, like offering a deferred payment or seller financing.
Whatever approach you choose to the buyer, you must understand that the net after tax benefits to you in a stock sale are 34% of the transaction value, while the net loss to you in an asset sale is 34% of the transaction value.
You can easily use this to justify a 34% higher price for an asset sale versus a stock sale.
The ordinary income in a C-Corp asset sale is often driven to the maximum 34% corporate tax.
As if this was not enough, the corporation pays the 34% tax bill and distributes the remaining assets to the shareholders.
The shareholders are then taxed at their long-term capital gains rate.
In a C-Corp stock sale, the stock is sold without taxation to the corporation.
The shareholders pay long-term gains only on the difference between their share of the distribution and the basis of the stock.
Buyers, however, often prefer the asset sale for their own reasons.
When purchasing the C-Corp as a stock sale, they not only inherit the corporation's assets, but any hidden liabilities as well.
Then, there is the fact that the buyer in such sale may get to step up the basis of all the assets and depreciate them at a higher rate than the current depreciation schedule allows.
As the seller, you might want to attempt to dissuade the buyer from an asset sale by offering a much higher price for the sale as compared to a stock sale.
You would explain this is necessary because of the punishing double taxation of such sale.
You might also agree to stringent warranties and a 10% to 15% escrow against any unforeseen liabilities.
This is still a much better option than the 34% loss of transaction value an asset sale would cost you.
If you have a sale that is heavily weighted in intellectual property and good will versus depreciable assets, step up in basis becomes less of an issue because the amortization schedule for goodwill is generally the same in both types of sales.
The thing is that you will have to be a savvy negotiator if you have an informed buyer.
The buyer knows that the asset sale greatly benefits them, while the stock sale is best for you.
There are terms you can negotiate to help offset this disparity, like offering a deferred payment or seller financing.
Whatever approach you choose to the buyer, you must understand that the net after tax benefits to you in a stock sale are 34% of the transaction value, while the net loss to you in an asset sale is 34% of the transaction value.
You can easily use this to justify a 34% higher price for an asset sale versus a stock sale.
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