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  • Digg it UP - Business Sellers - Beware of the C Corp Asset Sale

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    We recently completed a Merger and Acquisition engagement to sell our client to a large publicly traded company. Our client had started her company 25 years ago and had set it up a C Corp. She never was advised to change that structure in preparation for a much better tax treatment on the sale of the business.

    The buyer had an acquisition policy of only asset sales and no stock sales. The tax implications to our client were punishing. In a C Corp Asset Sale, there is no such thing as a long-term capital gain for the corporation. Since our client's basis (a software and consulting firm) was essentially $0, the entire sale amount would have been treated as ordinary in

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    her company 25 years ago and had set it up a C Corp. She never was advised to change that structure in preparation for a much better tax treatment on the sale of the business.

    The buyer had an acquisition policy of only asset sales and no stock sales. The tax implications to our client were punishing. In a C Corp Asset Sale, there is no such thing as a long-term capital gain for the corporation. Since our client's basis (a software and consulting firm) was essentially $0, the entire sale amount would have been treated as ordinary in

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    treatment on the sale of the business.

    The buyer had an acquisition policy of only asset sales and no stock sales. The tax implications to our client were punishing. In a C Corp Asset Sale, there is no such thing as a long-term capital gain for the corporation. Since our client's basis (a software and consulting firm) was essentially $0, the entire sale amount would have been treated as ordinary in

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    ations to our client were punishing. In a C Corp Asset Sale, there is no such thing as a long-term capital gain for the corporation. Since our client's basis (a software and consulting firm) was essentially $0, the entire sale amount would have been treated as ordinary in
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    ce our client's basis (a software and consulting firm) was essentially $0, the entire sale amount would have been treated as ordinary income and would have been taxed at a rate of about 30%. Once taxes are paid by the corporation and a distribution is made to the stockholders, the stockholders are then taxed at the 15% individual long-term capital gains rate.

    Let's say that the purchase price was $5 million. With an asset sale, the Corporation would first pay 30% of $5 million, or $1.5 million. On the distribution, the shareholders would pay 15% of the $3.5 million distribution or $425,000. The total tax paid is a whopping $1,925,000. Net proceeds to the seller are

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