Tax Strategies For Selling Your Company
By David Boatwright and Agnes Gesiko
Latham & Watkins LLP
The tax consequences of an asset sale by an entity can be very different than the
consequences of a sale of the outstanding equity interests in the entity, and the use of buyer
equity interests as acquisition currency may produce very different tax consequences than the use
of cash or other property. This article explores certain of those differences and sets forth related
strategies for maximizing the seller’s after-tax cash flow from a sale transaction.
Taxes on the Sale of a Business
The tax law presumes that gain or loss results upon the sale or exchange of property.
This gain or loss must be reported on a tax return, unless a specific exception set forth in the
Internal Revenue Code (the “Code”) or the Treasury Department’s income tax regulations
provide otherwise.
When a transaction is taxable under applicable principles of income tax law, the seller’s
taxable gain is determined by the following formula: the “amount realized” over the “adjusted
tax basis” of the assets sold equals “taxable gain.” If the adjusted tax basis exceeds the amount
realized, the seller has a “tax loss.” The amount realized is the amount paid by the buyer,
including any debt assumed by the buyer. The adjusted tax basis of each asset sold is generally
the amount originally paid for the asset, plus amounts expended to improve the asset (which
were not deducted when paid), less depreciation or amortization deductions (if any) previously
allowable with respect to the asset. Taxable gain is generally decreased, and a tax loss is
generally increased, by transactional costs and expenses paid by the seller.
Ordinary vs. Capital Gains and Losses
The character of a taxable gain or loss can be vital in determining the amount of tax due
upon the sale of corporate assets. Gain can be classified as ordinary income or capital gain. Gain
upon the sale of assets that are characterized by the C