Thinking of selling your business – Cash basis reporting is generally a less desirable tax reporting methodology in the context of M&A transaction planning. Currently, there are many potential traps and uncertainties in the tax code that prevent symmetry tax treatment; creating in many instances, a tax whipsaw effect with respect to cash basis taxpayers involved in a sales transaction.
The good news is with proper tax planning, there are numerous opportunities and applicable strategies to avoid asymmetrical tax results. For example, a taxpayer contemplating a change of control transaction as discussed above, should consider changing its cash basis tax method to the accrual basis in the year preceding the year of the contemplated sales transaction. This simple strategy affords business owners the ability to make an educated decision and depending on the underlying facts and circumstances (i.e., whether the return for the preceding year is extended, etc.), the switch does not need to occur until the transaction is completed.
Taxpayers should be aware that there are some tax professionals currently asserting that you can achieve comparable symmetry with cash basis reporting applying certain court case precedents and the application of constructive payment doctrine. However, if you peel the onion back, the applications of such tax strategy has a lot of technical challenges and inherit limitations with no technical authority support in certain situations, thus putting you at risk upon examination.
If you are a cash basis taxpayer planning for a sales transaction, please schedule a free consultation with Jorge Rodriguez, CPA. Jorge is a Tax Director and part of Aronson’s Financial Advisory Services Group. Jorge can be reached by email at firstname.lastname@example.org or (301) 222-8220.