What is in this article?:
- Understanding the Tax Bases of Assets Makes for Efficient Sales
- For which business assets held by the seller is the tax bases relevant?
- What is the initial basis of those assets?
- What adjustments to the initial bases of those assets are appropriate?
As the deal market heats up and more businesses are bought and sold, buyers and sellers will regularly negotiate not only purchase price but also the tax structure of the deal. Indeed, the price and tax structure are inseparable. Sellers should understand what tax structures might be most advantageous before the negotiations begin, and buyers should know what information they'll need from the sellers before they even contemplate an offer. To do so, a proper understanding of the tax bases of the assets relevant to the subject business is essential for both parties.
Simply stated, the tax basis of an asset is the adjusted cost of that asset for the purposes of determining the tax gain or loss realized upon the disposition of that asset. Accordingly, upon the sale of a business, the tax basis of the assets transferred will be important to the seller in assessing the form of the contemplated transaction and in evaluating the related sales price and after-tax proceeds. For the buyer, understanding the seller's tax basis provides insight into the seller's likely view of alternative transaction structures. In certain transactions, the buyer may actually "step into the shoes" of the seller; the seller's tax basis becomes the buyer's tax basis.
Despite the critical importance of tax basis in the process of negotiating the sale and purchase of a business, this information is often not clearly and timely understood by either party. The reason for this knowledge gap might be attributed in part to the fact that the computation of tax basis can be very complex. Additionally, a taxpayer's accurate computation of tax basis often may not be relevant until such time as that tax basis impacts the determination of that taxpayer's (or another taxpayer's) taxable income.While an approach to understanding tax basis issues will be unique to each business, the following approach may be helpful to the seller in identifying and determining that tax basis. A buyer may find the same approach helpful in discussing the tax basis issue with the seller.