M&A Tax Planning Strategies for S Corporations

This CLE/CPE course will provide tax professionals guidance on tax challenges in S corporation mergers and acquisitions and available tax planning techniques. The panel will discuss key legal and tax considerations for both buyers and sellers, the pros and cons of asset sales versus stock sales, qualifying for installment sales treatment as an S corporation, built-in gains tax, and taxation of the shareholders. The panel will also discuss 338(h)(10) and 336(e) elections and other critical tax issues that need to be accounted for to achieve the most beneficial tax outcome.

Tax advisers should not overlook the potential tax pitfalls in S corporation mergers or acquisitions. Failure to comply with the requirements of an S corporation, an improper election, and other missteps can have significant adverse tax consequences. The panel also will explore F reorganizations involving S corporations and explain why they are so commonly used in advance of an acquisition.

When it comes to an asset versus a stock sale, purchasers generally prefer buying a business' assets, allowing for depreciation of newly acquired assets at fair market value and the write-off of the purchase price using bonus depreciation or Section 179 deductions. Sellers generally prefer stock sales because gains are treated as capital gain (which can be taxed at preferential tax rates) and the sale may qualify for installment sale tax treatment. If an election under 338(g) or 338(h)(10) is properly made, even sales that are legally treated as stock sales could be treated as asset sales for tax purposes.

For S corporations that were previously C corporations, sellers must consider the tax effect of built-in gains. Even though S corporations are used to avoid two layers of tax, there can still be two layers of tax without proper planning.

Listen as our panel of flow-through entity experts examines specific scenarios regarding purchases and sales of S corporations and provides explanations of the tax consequences of each.