What are the tax consequences of a taxable merger?

Taxable acquisitions result in greater inventory cost and depreciation tax benefits to the buyer and more tax to the seller. Tax-free reorganizations allow the seller to avoid current payment of at least some taxes but result in less favorable tax benefits to the buyer.

What is a Type A reorganization?

A type A Reorganization is a tax-free merger or consolidation. Generally, in a merger, one corporation (the acquiring corporation) acquires the assets and assumes the liabilities of another corporation (the target corporation) in exchange for its stock.

Are reorganizations tax free?

Reorganizations, while not generally taxable at the entity level, are not completely tax-free to the selling shareholders. A reorganization is immediately taxable to the target’s shareholders to the extent they receive non-qualifying consideration, or “boot”.

What types of consideration can be used in Type A reorganizations?

In a Type A reorganization under recent Treasury​ Regulations, at least​ 60% of the consideration used must be the acquiring​ corporation’s stock. This rule permits money securities and other property to constitute up to​ 40% of the total consideration used.

What are the tax benefits of a merger?

The gains from an acquisition may result from one or more of the following five categories: revenue enhancement; cost reductions; lower taxes; changing capital requirements; and a lower cost of capital. Increased revenues may come from marketing gains, strategic benefits, and increased market power.

What are the requirements for an A reorganization?

A Type A reorganization must fulfill the continuity of interests requirement. That is, the shareholders in the acquired company must receive enough stock in the acquiring firm that they have a continuing financial interest in the buyer.

What is the difference between a Type A merger and a Type A consolidation?

A merger is the union of two or more corporations, with one of the corporations retaining its corporate existence and absorbing the others. The other corporations cease to exist by operation of law. A consolidation occurs when a new corporation is created to take the place of two or more corporations.

Can an S corp do a tax free reorganization?

In a tax-free reorganization, an S-corporation can be the target corporation or acquiring corporation, or both. The S-corporation status of a surviving target in a tax-free reorganization generally terminates because the surviving target has a disqualified stockholder (a corporation).

How is an acquisition taxed?

Broadly speaking, acquisitions can be structured as either asset or stock sales. In a taxable stock acquisition, the buyer acquires stock from the target company’s shareholders, who are taxed on the difference between the purchase price and their outside basis in the target’s stock.

What is a Type A acquisition?

Type A reorganization is a “statutory merger. This is a common form of combination in the mergers and acquisitions process. or consolidation.” These are mergers or consolidations effected pursuant to state corporate law. A merger is a union of two or more corporations.

How do corporations avoid taxes?

Key Takeaways

  1. Corporations have four tactics for reducing or eliminating the taxes they pay, including accelerated depreciation, offshoring profits, awarding stock options, and maximizing tax credits.
  2. Accelerated depreciation is the most rewarding of these tax breaks.