Understanding the tax implications of buying or selling a practice – The stock sale

Succession Planning

Understanding the tax implications of buying or selling a practice – The stock sale

The third in a five-part series about the decision process when buying or selling a business

The Stock Sale

Whereas the asset sale is the most common business acquisition method, the stock sale is probably the least common transaction. The top considerations come down to the buyer potentially assuming legal liabilities and tax consequences. Typically, in a stock purchase the legal liability will follow the ownership of the stock. This is the main reason why, when corporations make stock acquisitions, there is typically a very robust indemnification agreement along with amounts withheld in escrow. The indemnification agreement specifically addresses the known and/or unknown legal costs that may be acquired along with the stock of the entity, and the escrow provides an amount certain should the buyer receive a claim.

As with any stock purchase, the seller will generally be eligible to receive short-term or long-term capital gain tax treatment on the sale of stock, based on the seller’s holding period. The buyer’s cost basis will generally be what he or she paid for the stock, and that basis is generally not available for deprecation or amortization. Furthermore, that basis is realized only when the stock is sold or disposed of in some other manner.

There are certain instances in which a buyer can make an election to treat a stock purchase as an asset purchase. Specifically, this is a §338(h)(10) election, and it is generally only available to the buyer during a limited time period. Further discussion of this tactic is outside the scope of this paper.

Click here to download a printable PDF of the Stock Sale Case Study.

This information likely does not address the implications of each specific transaction. Please be aware that this information is intended to provide an overview only and is not a substitute for specific transaction guidance from an attorney, certified public accountant, enrolled agent or other subject matter expert. For specific transactional related advice, please consult with your own tax and/or legal counsel.

CIRCULAR 230 NOTICE: To comply with U.S. Treasury Department and IRS regulations, we are required to advise you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this transmittal is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding penalties under the U.S. Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this document or other related materials.

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