Tax Law ✦ Business Sale & M&A
You’ll Sell the Business Once. The Tax Mistakes Are Permanent.
The difference between a well-structured sale and a signed-too-soon sale is routinely 10 to 20 percent of the price, and it is decided before the letter of intent, not at closing. North Star Law Firm structures New Mexico business sales and acquisitions with the deal documents and the tax modeling handled by the same attorney-CPA.
Overview
Why does deal structure decide the tax bill?
Because “selling the business” is really a bundle of choices, and every one has a rate attached. Asset sale or equity sale. Purchase price allocated to goodwill or to equipment. Cash at closing or an installment note. Consulting agreement or covenant not to compete. Each choice moves dollars between capital gain and ordinary income, between tax now and tax later, and between your pocket and the buyer’s depreciation schedule, which is exactly why buyers and sellers want opposite answers. A seller who negotiates price before structure has given away the only leverage that matters, since a buyer who gets favorable structure can afford to pay more, and the sophisticated conversation is about after-tax proceeds, never the headline number.
- After-tax modeling of asset versus equity structures before the LOI
- Purchase price allocation negotiated and reported consistently (Form 8594)
- Installment sale design under I.R.C. § 453, with pitfalls mapped
- Tax due diligence for buyers: payroll, GRT, worker classification exposure
- F reorganizations and pre-sale restructuring for cleaner equity deals
- New Mexico angles: GRT on the transaction, PTE election in the sale year
The Structures
Asset sale or equity sale: who wins what?
| Issue | Asset sale | Equity (stock/interest) sale |
|---|---|---|
| Buyer’s tax position | Stepped-up basis; depreciation restarts; buyers pay more for this | Carryover basis; buyers discount for it |
| Seller’s tax character | Mixed: gain split across equipment (recapture, ordinary), inventory, goodwill (capital) | Generally one capital gain on the equity |
| Double tax risk | Severe for C corporations; manageable for flow-throughs | Avoided; why C corp owners fight for stock deals |
| Liability transfer | Buyer picks assets, leaves most liabilities | Buyer takes history: taxes, lawsuits, everything |
| New Mexico GRT | Can touch parts of the transaction; deductions must be claimed correctly | Equity transfers outside the GRT base |
Middle paths exist and often win: an equity deal with a § 338(h)(10) or § 336(e) election, or an F reorganization that lets the buyer purchase a clean new entity while the seller keeps equity-sale treatment. The right hybrid depends on entity type, basis, and what the buyer’s lender will accept, all knowable months before the deal.
What is the allocation fight, and why does goodwill matter?
In every asset deal, the price gets allocated across seven IRS classes, and both sides must report the same allocation on Form 8594. Dollars allocated to equipment trigger depreciation recapture taxed as ordinary income to you and fast write-offs for the buyer, especially with 100 percent bonus depreciation restored. Dollars allocated to personal goodwill, in the right cases, flow to the owner as capital gain and skip the corporate level entirely, a structure that must be built on genuine facts about whose relationships drive the business. Consulting agreements are ordinary income plus self-employment tax; covenants not to compete are ordinary income without SE tax; neither should be sized by accident. The allocation schedule is a negotiation inside the negotiation, and it is where an attorney-CPA quietly earns the fee.
Should you take an installment note?
Installment reporting under I.R.C. § 453 spreads gain across the years payments arrive, which can hold income under bracket thresholds, the net investment income tax, and New Mexico’s top 5.9 percent bracket year by year. It also leaves you a creditor of the business you just handed over, so the tax answer and the credit answer must be made together: security agreements, personal guarantees, acceleration triggers. Depreciation recapture cannot be deferred, it is taxed in the year of sale regardless of when cash arrives, a nasty surprise for equipment-heavy sellers. And sellers holding notes should know the opportunity in New Mexico’s capital gains deduction, which for qualifying sales lets individuals deduct the greater of $2,500 or 40 percent of up to $1 million of net capital gain from New Mexico taxable income, a state-side discount worth up to roughly $23,000 that many preparers miss in the sale year.
What does buy-side tax diligence look for?
The liabilities that follow the deal. Payroll tax deposits and worker classification, because misclassified crews create successor exposure. Gross receipts tax compliance, since a target that never registered or under-collected hands the buyer a problem that survives closing in equity deals and can even follow assets under successor liability principles. PTE elections and state filings in order. Sales into other states creating unregistered nexus. We run diligence with the same eyes we use defending audits, which is precisely the point, and when a target’s problems surface, they become price adjustments and escrows instead of post-closing litigation.
The Attorney-CPA Difference
The deal lawyer and the tax modeler, in one chair.
- After-tax proceeds modeled across structures before you sign anything
- Allocation, note terms, and employment agreements negotiated as one tax package
- Pre-sale cleanups: F reorgs, S elections, GRT and payroll compliance
- New Mexico capital gains deduction and PTE timing captured in the sale year
Questions & Answers
Business sale questions, answered
When should the tax planning start?
Ideally a year or more out. Some of the best tools, S elections aging past built-in-gains exposure, restructurings, personal goodwill positioning, need seasoning time, and everything gets harder after a letter of intent locks the structure. Even sixty days helps. The week before closing mostly leaves damage control.
The buyer insists on an asset purchase. Am I stuck with the bad tax result?
Not entirely. The allocation, the note, personal goodwill where the facts support it, and price itself are all levers. A buyer demanding asset treatment is buying your tax cost, and the counter is arithmetic: show the after-tax gap and split it in the price.
Does New Mexico tax my gain when I sell?
Gain flows into New Mexico taxable income at rates up to 5.9 percent, softened by the state’s capital gains deduction, the greater of $2,500 or 40 percent of up to $1 million of qualifying net gain. Residency timing, installment spreading, and the PTE election’s interaction all move the state number materially.
What happens to my employees’ and the company’s tax problems after closing?
In an equity sale, they are the buyer’s problems now, which is why diligence and indemnities exist. In an asset sale, most stay behind with the seller, though trust-fund payroll taxes and certain state liabilities can chase further than sellers expect. Either way, they get priced, so fixing them before market beats disclosing them during it.
I’m the buyer. Why do I need tax counsel if the seller drafted everything?
Because every default in a seller-drafted deal leans their way: allocation tilted to goodwill, thin reps on payroll and GRT, no escrow for the audit that arrives eighteen months later. Buy-side review typically costs a fraction of one discovered exposure.
Negotiate the structure before you negotiate the price.
Bring the financials and the buyer’s term sheet if one exists. You will leave with an after-tax comparison of your real options and a list of what to fix before diligence finds it.