Minimizing tax liabilities in M&A transactions

Navigating tax implications in M&A transactions is a critical aspect of maximizing the proceeds from a business sale. Without careful tax planning, business owners can face significant reductions in their take-home value. The structure of the sale—whether it’s an asset or stock sale—can play a major role in determining tax liabilities.

Asset Sale vs. Stock Sale

Asset sales could result in higher taxes due to capital gains on individual assets and the potential recapture of depreciation. In contrast, a stock sale allows sellers to claim capital gains tax rates, which are typically lower. The decision between an asset sale and a stock sale should be made in consultation with a tax advisor to ensure the most favorable outcome.

Planning for Capital Gains

Capital gains taxes can significantly reduce the net value of a sale. One way to mitigate the impact of capital gains taxes, especially in years where a seller has high tax liabilities from higher income is through installment sales, in which payments are spread over multiple years and allow the seller to potentially pay a lower capital gains rate in later years. The decision to make installment payments should be considered by a tax professional. Sellers may also consider the potential benefits of tax-deferred structures to minimize immediate tax exposure.

Leveraging Tax-Advantaged Strategies

There are several tax-advantaged strategies that should be considered long before a sale takes place. For instance, qualified small business stock (QSBS) exclusions allow for gains from the sale of certain types of businesses to be excluded from federal taxes. However, business owners will need to ensure proper elections take place long before a business sale.

Sellers can also explore 1031 exchanges, which allow them to defer capital gains taxes by reinvesting proceeds into similar assets. However, a 1031 exchange would require the seller to identify a replacement investment within 45 days of the transaction close date, making early planning critical. 

Finally, business owners and executives with significant vesting shares have the option to take an 83b election at the time of share grant, which could have significant implications for gains taxed at either ordinary or capital gains. 

Proper tax planning ahead of a sale is vital to securing the best possible financial outcome. 

For more information, explore our Tax Implications of Selling a Business guide.