April 30, 2017

Looking at Various Companies to Buy?

Looking at Various Companies to Buy?

Let me give you a few things to consider:


  • There’s a way for your corporation to buy the stock of an S corporation and treat the acquisition as a tax-favored asset purchase.  
  • Your corporation can qualify for this same favorable asset purchase treatment when it acquires a C corporation owned by a C corporation (think subsidiary here).  
  • And if you decide to make the purchase individually or with some fellow individual investors, you can buy the stock of the S corporation or C corporation owned by a C corporation and obtain the same tax-favored asset purchase treatment.

Of course, the downside to the stock purchase is that the company may have some hidden liabilities that could surface. Your lawyers and insurance professionals likely have a number of options you can use to mitigate the liability issues.

I’m here for the tax and practical advantages. Here are three basic advantages to buying the stock and qualifying the stock purchase as an asset purchase:


  1. You step up (increase) the tax basis of the purchased assets to reflect the purchase price. The step-up results in higher post-purchase depreciation and amortization deductions for depreciable and amortizable assets, and lower taxable gains when other assets (such as receivables and inventory) are sold or converted into cash.  
  2. You save the time and money you would otherwise spend in an asset purchase to transfer legal title to each asset.  
  3. The target company might have some valuable nontransferable assets—such as favorable building leases, licenses, and customer contracts. With a straight asset purchase, it might be difficult or impossible to obtain legal ownership of these assets, and that could be a deal breaker. In contrast, buying the target’s stock is a simple legal step for both you and the seller. Title to the company’s assets come under your control with no muss and no fuss—because you would own the target company, and the target company would own the desired assets.

As you can see, you gain some significant advantages when you can qualify to treat a stock purchase as an asset purchase.

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