Aronson has noticed that the current negotiation trend for large public companies and/or private equity strategic buyers, those who generally make-up the majority of the buyer pool for government contractors seeking exiting, is to not compensate the selling party for the incremental tax to be incurred upon transacting an asset sale form transaction versus straight stock sale.
The buyer party representatives controlling the negotiation will generally assert that the incremental tax burden to be incurred by the selling party for agreeing to an asset sale tax reporting treatment has already been considered in arriving at the selling price offering. Accordingly, it is vital for the selling party before commencing the negotiation phase to independently quantify the true incremental tax on an asset sale scenario, which could be more complicated than simply looking at the deferred taxes from the use of permissible tax accounting method.
For example, if your business that is taxed as a flow-through entity that is not subject to entity level taxation for federal and conforming states happens to be headquartered in Virginia, but a substantial amount of business is conducted within Washington, DC; you potentially on an asset sale tax election transaction have material incremental tax exposure from the gain that will be subject to double taxation of approximately 10%. Why? Because of the Washington, DC entity level imposed franchise tax of 9.975%, with no offsetting credit in your resident state of Virginia. Another example would be if one of the selling shareholders happens to be a bona fide resident of a state with no income taxes such as Florida, Texas, Washington State, etc., in such instance, there is clearly an incremental tax burden to be incurred by that particular selling shareholder on an asset sale involving a flow-through selling entity.
There is a sequence of tax planning techniques that could be incorporated into the final deal to mitigate and/or lessen the whipsaw effects from the described incremental tax scenarios. If you are interested in discussing how to effectively structure the sale of your business, please contact Jorge Rodriguez at 301.222.8220 or email me at email@example.com.