The U.S. tax code is a very complicated, convoluted and complex system. When it was originally established there were few loopholes, exemptions, and deductions; however, over the years lawmakers put some deductions in place here and others in place there, all the way till a vastly complex system has been developed. Sadly, the system is set up on politics and not principles thus allowing it to change and alter depending on whoever is the elected official.
The benefit to this, however, is that if you have a connection with a tax lawyer or accountant who is very well versed in the tax code then you can legally avoid—not evade—paying an outrageous amount of taxes. The typical method for calculating the taxable income after the sell of a business is by taking the selling price of your business and deducting the company’s accounts payable, retained earning, and any additional fees that you accrue during the sale such as legal, accounting, or advisory fees.
One other point to note is that if you structure the merger or acquisition deal so that the inventory is purchased by itself and the business has its own value then the purchase price of the inventory is not taxable. For example, if your business is valued at $3,000,000 and the value of the inventory is $800,000, the retained earning is $500,000, and the accounts payable is $400,000 with additional fees at $250,000 then the taxable portion is $1,050,000. Not bad considering that you just put $2.75 million in your pocket.
To expound what I was explaining with tax benefits further, if you take those funds, in this case the $1,050,000, and reinvest them the money essentially stays behind a tax wall that won’t be affected till the funds are withdrawn. For further examples of M&A tax planning we advise you to speak to one of Deal Capital’s professionals.