M&A Shop Talk: Tax M&A Consultation Offering for Government Contractor Part I

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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 jrodriguez@aronsonllc.com.

Read M&A Shop Talk: Tax M&A Consultation Offering for Government Contractor Part II.

About Jorge Rodriguez

Jorge Rodriguez has written 26 post in this blog.

Jorge L. Rodriguez, CPA, serves as a partner in Aronson's Tax Services Group. He is a seasoned professional with more than 25 years of public accounting experience. He is known for delivering a broad, in-depth tax perspective, informed by his deep, wide-ranging industry knowledge, to every engagement for the benefit of his diverse clientele. Jorge specializes in federal tax consulting and compliance with a special focus on M&A transaction structuring, planning, and modeling. He routinely helps his clients resolve highly complex tax matters including: entity formation, classification, and conversion planning issues; accounting method and period elections and changes; consolidated tax return filling elections and tax accounting concerns; Sec 382 analysis and study; and all aspects of ASC 740 compliance involving purchase accounting and foreign operation reporting areas. Jorge works with a broad cross section of companies. His clients include emerging businesses, middle-market firms, and public business enterprises engaged in a wide variety of industries including government contracting, software development, light manufacturing, IT technology services and products sales, and specialty construction contracting. Jorge is passionate about helping his clients formulate tax strategies that make business sense. He shares his expert insights freely as a regular contributor to Aronson’s Tax Matters blog with series such as “M&A Shop Talk.” Prior to joining Aronson in 2009, Jorge was a practicing tax partner with several regional public accounting firms. He is licensed to practice in Maryland and Virginia. Professional & Community Involvement: Maryland Association of Certified Public Accountants: Member American Institute of Certified Public Accountants: Member Education: University of Maryland: Bachelor of Science in Accounting -Ongoing education in tax matters

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