A business can be bought out as either a stock or an asset sale. The purchaser can either buy the assets of a business or the stock/ownership interests. Just because a deal is structured as an "asset purchase", doesn't mean that the buyer is only getting the equipment. You can still buy the "goodwill" of a business (e.g., employees, customer relationships, branding, etc) in an asset purchase.

While the stock vs. asset purchase decision is important and warrants its own article, today we're focused on the tax implications between the two.

Stock Purchase Tax Implications

A buyer can directly purchase an ownership interest if the target business is operated as a C- or S-corporation, a partnership, or a limited liability company (LLC). In the case of a C-Corp, this means purchasing the underlying shares. In the case of a partnership or LLC, the buyer would be purchasing the partnership interests or membership units, respectively.

Generally, it is more favorable to the seller when the transaction is structured as a stock sale. Especially when a business is a C corporation, the seller has a strong preference for selling stock rather than assets because it clearly avoids the possibility of double taxation. Since the seller's earnings from a sale are almost always treated as capital gains, stock sales qualify them for a preferential tax rate (currently 20% for 2021).

Outside of the tax implications, there are other risks a buyer in a stock transaction should consider:

Asset Purchase Tax Implications

As a buyer, in almost every instance, making an asset purchase will benefit you in regards to Tax Implications if the proper steps are taken.

To reduce the sales tax on the asset sales of businesses, buyers should make sure to inform their state’s taxing authority to give them a final opportunity to collect any pending sales taxes from the seller.

From a tax standpoint, if the company is a corporation, the buyer will benefit from structuring the transition as a purchase and sale of the company’s assets rather than buying the stock of the company. This allows the buyer to write up the tax bases of the company’s assets and thereby report greater depreciation and amortization deductions and smaller amounts of gain on re-sales of the purchased assets.

Additionally, in an asset sale, the company is selling, and the buyer is buying the company’s various assets separately for allocable portions of the aggregate purchase price.

This allows the buyer to allocate as much purchase price as possible to assets that are eligible for bonus depreciation or that are likely to turn over in the short term.

There is also another way for the buyer to purchase a business through an asset sale.

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