Closely Held Business Advisor: The Tax Implications of C Corporation Acquisitions

March 9, 2016

If you’re in the market to acquire a C corporation, beware. There’s much you need to know about the tax ramifications of this type of transaction. Here are some of the key concepts to keep in mind.

What You Need to Know

Owners of a C corporation that holds real estate or other appreciated business assets may prefer to sell the corporation’s stock rather than incur the double taxation that would be imposed if the appreciated assets were sold and the proceeds were distributed to the stockholders. To facilitate a quick transaction, the owners might, therefore, offer a reduced price if you take on their corporate structure.

Potential purchasers, however, need to look beyond the price. They should carefully consider certain tax issues that wouldn’t ordinarily arise in a traditional real estate acquisition.

For instance, as mentioned, double taxation is one of the primary disadvantages of a C corporation. That is, the corporation’s profits are first taxed at the corporate level. Then, if the corporation pays out some of its profits as dividends, the dividend recipients are also taxed. On the flip side, ongoing tax losses — which are common with real estate activities — can’t be used to offset a shareholder’s other income because the losses are inside the corporation.

It usually isn’t advantageous to convert a C corporation to S corporation status, because of the taxes owners would face on built-in gains. Converting to a limited liability company could also have substantial negative tax consequences, because it would be treated as a liquidation.

How Basis Fits In

When you buy C corporation stock, the corporation’s tax basis in its assets isn’t impacted, as it would be if you had purchased the assets. While you, as the new owner, have tax basis in your stock equal to your purchase price, the depreciable assets inside the corporation simply continue to be depreciated as they were depreciated before.

We Can Help

If you’re considering a C corporation acquisition, be sure to work with your tax advisor. He or she can guide you through the process to help you avoid unpleasant surprises and plan so that your acquisition benefits from available tax advantages.