• Who We Are
    • Firm Overview
    • Our Team
    • International
    • Life at Botwinick
    • Reviews
  • What We Do
    • Accounting
    • Assurance & Attestation
    • Business Consulting & Advisory
    • Contract Compliance
    • Forensic Accounting
    • Tax Compliance & Planning
  • Industries We Serve
    • Contractors
    • Dental Practices
    • Distribution, Logistics, & Warehousing
    • Manufacturing
    • Medical
    • Professional Services
    • Real Estate
    • Retail
    • Sports & Entertainment
    • Tech
  • Work With Us
  • Insights
  • Client Access
  • Contact
  • Client Login
  • Pay Online
  • Visit Our Office
  • LinkedIn
  • Facebook
  • Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
    (201) 909-0090
Botwinick Logo
  • Who We Are
    • Firm Overview
    • Our Team
    • International
    • Life at Botwinick
    • Reviews
  • What We Do
    • Accounting
    • Assurance & Attestation
    • Business Consulting & Advisory
    • Contract Compliance
    • Forensic Accounting
    • Tax Compliance & Planning
  • Industries We Serve
    • Contractors
    • Dental Practices
    • Distribution, Logistics, & Warehousing
    • Manufacturing
    • Medical
    • Professional Services
    • Real Estate
    • Retail
    • Sports & Entertainment
    • Tech
  • Work With Us
  • Insights
  • Client Access
  • Contact
  • Show Search
Hide Search

Blogs

M&A transaction

How Do Taxes Factor Into An M&A Transaction?

Ken Botwinick, CPA | 08/01/2022

Although merger and acquisition activity has been down in 2022, according to various reports, there are still companies being bought and sold. If your business is considering merging with or acquiring another business, it’s important to understand how the transaction will be taxed under current law.

Stocks vs. assets

From a tax standpoint, a transaction can basically be structured in two ways:

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income than it would have years ago. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

Under current law, individual federal tax rates are reduced from years ago and may also make ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also will be taxed at lower rates on a buyer’s personal tax return. However, individual rate cuts are scheduled to expire at the end of 2025, and, depending on future changes in Washington, they could be eliminated earlier or extended.

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

Note: In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” Ask your tax advisor for details.

What buyers and sellers want

For several reasons, buyers usually prefer to purchase assets rather than ownership interests. Generally, a buyer’s main objective is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

Meanwhile, sellers generally prefer stock sales for tax and nontax reasons. One of their main objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Keep in mind that other issues, such as employee benefits, can also cause unexpected tax issues when merging with, or acquiring, a business.

Get professional advice

Buying or selling a business may be the most important transaction you make during your lifetime, so it’s important to seek professional tax advice as you negotiate. After a deal is done, it may be too late to get the best tax results. Contact us for the best way to proceed in your situation.

© 2022

Share:
author avatar
Ken Botwinick, CPA Partner, CPA
Ken Botwinick, CPA is a Partner with Botwinick & Company, LLC and has been with the firm for more than 25 years. Ken specializes in providing accounting, tax, and business consulting services to dental and medical practices. He established the firm’s dental practice and is a sought-after lecturer at dental continuing education programs. Ken has his “finger on the pulse of the dental industry,” and with comprehensive experience in ownership transitions, he assists clients in the healthcare industry to reach their professional and financial aspirations and goals.
See Full Bio

About Ken Botwinick, CPA

Ken Botwinick, CPA is a Partner with Botwinick & Company, LLC and has been with the firm for more than 25 years. Ken specializes in providing accounting, tax, and business consulting services to dental and medical practices. He established the firm’s dental practice and is a sought-after lecturer at dental continuing education programs. Ken has his “finger on the pulse of the dental industry,” and with comprehensive experience in ownership transitions, he assists clients in the healthcare industry to reach their professional and financial aspirations and goals.

Primary Sidebar

Related Posts

Understanding Startup Costs and Tax Deductions: A Must-Read for New Business Owners

Understanding Startup Costs and Tax Deductions: A Must-Read for New Business Owners

Ken Botwinick, CPA | 06/30/2025

According to the U.S. Census Bureau, nearly 447,000 new business applications were filed in May 2025 alone—a strong signal that entrepreneurial spirit in America remains vibrant. If you’re among the growing number of startup founders, it’s important …

Read More about Understanding Startup Costs and Tax Deductions: A Must-Read for New Business Owners

How to Safeguard Your Business Expense Deductions: Essential DOs and DON’Ts

How to Safeguard Your Business Expense Deductions: Essential DOs and DON’Ts

Ken Botwinick, CPA | 06/24/2025

If you plan to deduct business meals, vehicle use, or home office expenses, be prepared—the IRS scrutinizes these claims closely. Many taxpayers fail to meet the strict substantiation requirements imposed by the tax code, often due to poor …

Read More about How to Safeguard Your Business Expense Deductions: Essential DOs and DON’Ts

Big Tax Breaks Ahead? What Business Owners Should Know About the Latest Congressional Proposals

Big Tax Breaks Ahead? What Business Owners Should Know About the Latest Congressional Proposals

Ken Botwinick, CPA | 06/11/2025

As tax season planning ramps up, business owners may want to keep a close eye on Capitol Hill. A new legislative proposal — dubbed The One, Big, Beautiful Bill — is currently under debate and could introduce sweeping changes to federal tax law. The …

Read More about Big Tax Breaks Ahead? What Business Owners Should Know About the Latest Congressional Proposals

Botwinick Logo

Contact Us

365 West Passaic Street

Suite 310

Rochelle Park, NJ 07662

info@botwinick.com
(201) 909-0090
(201) 909-8533

2700 N Military Trl

#240

Boca Raton, FL 33431

info@botwinick.com
(561) 787-0225
Boca Raton Accounting Firm

Follow Us

© Botwinick & Company, LLC. All Rights Reserved. | Privacy Policy | Terms & Conditions
Website Design & Development by SHJ
  • Pay Online

  • Visit Our Office

  • LinkedIn

  • Facebook