CHAPTER 13

Tax Provisions Used in M&A

This chapter is somewhat of a continuation of Chapter 12 and provides more in-depth discussion of the tax rules applied in many merger and acquisition (M&A) transactions for closely held companies.a As in Chapter 12, at the end of this chapter is a short “Tax Glossary” to provide additional clarification about some of the key concepts used. This chapter addresses the following:

  • Installment sales
  • Section 1031 (like-kind) exchanges
  • Partnership M&A
  • Corporate M&A

INSTALLMENT SALES

When a company sells its assets, but the receipt of the consideration is deferred, the tax law allows for the seller to defer the recognition of tax gain along with it. The basic installment method requires that a gross profit percentage be determined for the asset being sold, using the total sale price less the seller's basis in the assets sold. Then, as payments are received, the payments are multiplied by the gross profit percentage to arrive at the recognized gain for that year. Table 13.1 illustrates this concept.

Table 13.1 Installment Sale Calculation

Maximum sales price $1,000,000
Cost basis in assets (300,000)
Gross profit 700,000
Gross profit % 70%
Yearly principal payments 100,000
Gross profit % 70%
Gain recognized (plus interest) $70,000

That is the basic rule. But, of course, with any tax law, there are exceptions and rules that must be followed. The deferral can take place in many different forms:

  • Promissory note
  • Holdback
  • Escrow ...

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