Merging two businesses is not easy.
Merging two small businesses is no easy feat. Not only will you have to navigate the sale, prepare staff, and re-structure your model, but you’ll need to examine its tax implications.
And, having to navigate the IRS rules can be difficult. Especially given that there is no clear answer when it comes to mergers. Rather, it all depends on the type, scope, and earnings from the transaction.
Though we always suggest its best to speak with a professional, we’ve come up with a brief guide below outlining the implications you might face during the process.
Is My Merger Even Taxable?
Simply put – almost all mergers are taxable endeavors. But, there are variations that can determine who, and how much you might owe.
Generally, the most common type of taxable merger that we see occurs when one company is absorbed into another, and the surviving company will continue to operate. In this case, both companies will be held responsible come tax season.
Even the company in the merger that doesn’t survive must declare any income earned from the sale (even if it’s in stocks or assets) and pay taxes on it for that tax year. But, this is only if the amount earned is more than a loss.
As for the remaining company, they will need to claim any gains or losses (even if it’s with stocks) come tax season. And, as they continue to operate, will need to track their revenue and assets earned to claim that as well.
When is it Not Taxable?
It is extremely difficult to avoid hefty taxes when merging companies. And, the IRS will not be very forgiving if you fail to claim any gains.
But, there is a unique situation in which you might find yourself forgoing a payment. This tends to be during a reorganization. During this process, taxes are not immediately owed, as it is technically a combination (or swap), of assets and equity as opposed to an outright sale.
The only other scenario in which a company might be able to forgo paying taxes is if the company moves outside of the U.S. However, though you might forgo U.S taxes, there might be other foreign taxes, relocation fees, and regulations associated with doing so.
What is Taxable Income?
As you can tell, when companies merge, there are a number of implications that go along with it.
Companies will need to pay taxes on the value of any capital, stocks, and assets acquired during the process of the merge. This means it’s not just what’s acquired on the day of the merge itself. Rather, everything that was gained throughout the entire endeavor. Keep in mind, that assets can be anything of value (physical property, equipment, merchandise, etc.) to intangible items (such as patents or franchise rights),
This is why it’s best to consult with professionals throughout the entire process, and not just towards the end.
Otherwise, you might have an unrealistic view on how much money is owed come tax season.
Ultimately, merging companies is not an easy task. That’s why we always suggest having the help of a professional by your side.
Our team of experts can make sure your merge is seamless. We will take the time to carefully track, inform, and handle all of your transactions. That way, you can rest assured that you won’t owe big come tax season. If you’d be interested in learning more, give us a call at 407-328-5001.
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