Buyers often prefer to structure family business acquisitions as taxable asset purchases. In a taxable asset purchase, the buyer is entitled to write up the basis of the seller’s assets to fair market value, and then going forward, receive a tax benefit by depreciating the assets. In addition, a buyer is entitled to amortize goodwill (i.e., the portion of the purchase price in excess of the fair market value of the purchased assets) over 15 years.
Under prior tax law, selling assets was often cost-prohibitive for a family business taxed as a C-corporation. The combined federal rate under prior tax law was 48 percent (resulting from a 35 percent corporate tax rate combined with a 20 percent tax rate on dividends received by non-corporate shareholders). When buyers insisted on an asset purchase and the owners of the seller were unwilling to pay half of their sales proceeds in taxes, the deal was likely to fall apart.
Under the new Tax Cuts and Jobs Act, the corporate tax rate was permanently reduced from 35 percent to 21 percent. The lower rate makes asset sales more attractive for sellers. Now, the combined federal rate is 36.8 percent, as compared to 48 percent under prior law. Asset sales are no longer as costly as they were for family business sellers.
Under the new tax law, there is also an additional incentive that makes buyers even more likely to favor asset acquisitions. The Tax Cuts and Jobs Act now allows for full expensing of most types of “qualified property” acquired after September 27, 2017. Significantly, “qualified property” includes used property acquired from any unrelated party. Because full expensing applies to used property, asset purchasers can now deduct the portion of the purchase price allocable to qualified property.
The lower corporate tax rate, together with immediate expensing of qualified property, makes asset deals more attractive for buyers and sellers.