How can you structure a deal to be tax-efficient?

Tax efficiency is a key factor in any deal, whether you are buying, selling, or merging a business. It can affect the price, the cash flow, the risk, and the return of your investment. But how can you structure a deal to be tax-efficient? Here are some tips to consider.

1 Choose the right entity type

The type of entity you are dealing with can have a significant impact on the tax implications of the deal. For example, if you are buying or selling a C corporation, you may face double taxation on the corporate and personal level. However, if you are dealing with a pass-through entity, such as an S corporation, a partnership, or an LLC, you can avoid this problem and enjoy lower tax rates. Therefore, you should evaluate the entity type of your target or buyer and see if you can convert it to a more favorable one before or after the deal.

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Joel Hogarth

Founder and Managing Director at Eliot & Luther
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More AI speak where the questions are far too generic. Deal? What type of deal? Q2 seems to assume an M&A. Usually you don’t get a choice of entity type for the target or the seller are they are already in existence. A buyer might have some flexibility but this is more about post-deal efficiency not deal efficiency. The seller should start by looking at the current tax elections and treatment and see what the tax effect of a sale is as it stands. You then might look at whether there are easy solutions to reduce tax (such as paying a dividend to reduce the tax base or making a tax election), or whether more sophisticated planning is needed. But this needs more than 750 even to outline!

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Graham Garven

I help companies navigate investment in Indonesia. Based nr Edinburgh but with a fully functioning team in Jakarta providing business support services. Focus is on optimisation within the tax and regulatory framework.
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This generic answer is very US centric and not very helpful to most practical applications. The simple generic answer would be to ensure that someone with appropriate knowledge and experience addresses the tax options from the get go - don’t bring them in at a later stage and expect them to work miracles. Broad questions such a person may ask to ensure they have the full picture: What is the objective of the ‘deal’? What options are available, within the regulations and acceptable to both parties? Are there any steps to take pre-deal, under any of the options, which would change the tax outcome? Etc.. This person (team) should be kept informed of progress and any planned changes to steps - don’t assume changes will not have an impact

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2 Opt for an asset or stock sale

Another important decision you need to make is whether to structure the deal as an asset sale or a stock sale. Generally, buyers prefer asset sales because they can step up the basis of the assets and deduct the depreciation and amortization expenses. Sellers, on the other hand, prefer stock sales because they can avoid paying tax on the difference between the book value and the fair market value of the assets. The choice of asset or stock sale depends on various factors, such as the tax attributes of the parties, the nature of the assets, the liabilities involved, and the negotiations between the parties.

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3 Use debt or equity financing

The way you finance the deal can also affect the tax efficiency of the deal. If you use debt financing, you can deduct the interest expenses from your taxable income and reduce your tax burden. However, you also need to consider the risk of default and the debt covenants that may limit your flexibility. If you use equity financing, you can avoid paying interest and maintain more control over the business. However, you also need to share the profits and the ownership with the investors. The optimal mix of debt and equity financing depends on your cost of capital, your cash flow projections, and your risk appetite.

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Eyamide “Dee” Garrett
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If you have an Indexed Universal Life insurance policy that has grown enough cash value, borrow tax free from your policy! You will still get the upside growth potential of the market on your money and be guaranteed zero loss. Be your own bank!

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4 Leverage tax credits and incentives

Another tip to structure a deal to be tax-efficient is to leverage the tax credits and incentives that may be available for your deal. For example, if you are buying or selling a business that operates in a qualified opportunity zone, you may be eligible for deferring or excluding capital gains tax. If you are buying or selling a business that engages in research and development activities, you may be eligible for claiming the R&D tax credit. If you are buying or selling a business that employs certain workers, you may be eligible for claiming the work opportunity tax credit. You should consult with a tax professional to identify and maximize the tax credits and incentives that apply to your deal.

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5 Plan for post-deal integration

The last tip to structure a deal to be tax-efficient is to plan for the post-deal integration of the businesses. This involves aligning the accounting policies, the tax reporting systems, the legal structures, and the operational processes of the parties. By doing so, you can avoid tax disputes, penalties, and inefficiencies that may arise from the differences and inconsistencies between the parties. You can also take advantage of the synergies and economies of scale that may result from the integration and improve your tax performance.

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