When merging with another business, you must think about how the transaction will affect both companies’ tax obligations. Even if both organizations are relatively small, you should hire a Certified Public Accountant (CPA) and a skilled lawyer familiar with the tax implications of merging with another company in Georgia. At Sparks Law, our legal team can advise you on how best to handle this type of business transaction
The way you structure your merger significantly impacts the taxes your business will have to pay. For example, if you structure the transaction as a like-kind exchange, you can avoid taxes altogether. However, other types of transactions may be considered a taxable event, in which you would pay taxes on whatever value you received in the deal.
Like business mergers, real estate is an area in which you should always pay attention to the tax implications of the sale. Imagine you bought a commercial office building in 2000 for $100,000, and it has doubled in value since then. Your basis would be $100,000.
If you decided to sell without buying another commercial property, you would not get taxed on the remaining $100,000. You would have profited from the commercial real estate deal.
Alternatively, if you use the funds from the sale to buy another commercial real estate location that costs $200,000, it is considered a like-kind exchange, and you can preserve your basis. However, it’s crucial to note that you must complete the second transaction within a set amount of time.
You can also use a like-kind exchange when structuring your merger. For example, if you sell 100 percent of your stock in a company for $100,00 and the buyer gives you $200,000 worth of stock in their company, it is a like-kind exchange because you are simply exchanging stock. You can avoid the taxable event and keep your basis—the amount of money you paid into the company. An experienced attorney can help you understand how you might draft the purchase agreement for your merger in a way that allows you to avoid taxes.
Many business owners merge with struggling companies specifically for the tax benefits. If a very profitable company merges with a business that has suffered many losses, it will acquire those losses. Consequently, the new conglomerate business will have less taxable income, reducing their overall tax burden. A knowledgeable Georgia lawyer can provide more information about tax strategies in mergers.
When planning a merger, you must also consider each company’s retained earnings and their impact on your taxes. When the Internal Revenue Service (IRS) issues you a K-1 tax form, you must report all the profit you made that year. Whatever you report in that form can make a merger incredibly complicated.
If your company profited by $30,000 in 2020, you would be taxed as if you received $30,000 in your pocket. However, if you have $20,000 worth of expenses that you must pay immediately on January 1, 2021, you may need to leave working capital in your company’s bank account. The money you have paid taxes on but haven’t yet taken out of your company is your retained earnings.
Although it’s quite common to have 10 or 20 percent of your annual revenue in retained earnings, you should note that this money will change your basis in terms of the merger transaction. Let’s say you have a $1,000,000 a year company with $200,000 of retained earnings. If you sell your company for $200,000, you will not be taxed for anything because you would have already paid taxes on the $200,000 retained earnings. So, when negotiating the terms of your merger, you should time the transaction based on when you pay taxes on your retained earnings.
If you’re operating your business out of Georgia and buying from or selling to a business owner in another state, you will need to consider how the state laws and tax codes will impact the merger. Some states are lowering tax rates for companies to incentivize business owners to base their operations in that state. You can do this even if you don’t have a physical presence in that area. For example, many companies are registered in Nevada, even though they don’t have physical locations.
As you discuss plans for a merger, think about which state provides the best tax opportunities. You might work out a deal where the business owner in Nevada gets the most cash from the merger, lessening the total tax burden of the merged company by a considerable percentage.
Joining forces with another company can be a great business decision, but you should always consider how taxes will impact the deal. Our attorneys can help you understand the tax implications of merging with another company in Georgia. Contact us today to schedule a consultation to discuss your situation.
