Clients often come to me with a purchase price already agreed to in principle and ask me to "paper the deal." But the structure you choose can change what each side actually keeps after tax. I would rather have that conversation before the number is locked in than after.
Here are the tax consequences I walk clients through before we ever draft a document.
1. Ordinary income versus capital gain
Not all sale proceeds are taxed the same way. Depending on how a deal is structured, part of the purchase price may be treated as capital gain, while another part, such as amounts allocated to inventory, receivables, or compensation for services like a consulting or non-compete agreement, may be treated as ordinary income.
Ordinary income is generally taxed at higher rates than long-term capital gain. Sellers who do not think through this distinction early can end up with a materially different after-tax result than they expected.
2. How the purchase price gets allocated
In an asset sale, the buyer and seller generally need to agree on how the purchase price is allocated among the assets being transferred. This allocation drives the buyer's future depreciation and amortization deductions and drives the character of the seller's gain.
Buyers often want more of the price allocated to items that can be depreciated or amortized quickly. Sellers often want more allocated to goodwill or capital assets that are taxed favorably. This is a genuine negotiation, not a formality, and it belongs in the letter of intent stage, not left until closing week.
3. Double taxation risk for C corporations
If the target is a C corporation and the deal is structured as an asset sale, the corporation may pay tax on the gain from the sale, and then shareholders may pay tax again when the proceeds are distributed. That two-layer exposure is one of the biggest reasons C corporation owners resist asset sales.
There are planning techniques that can sometimes reduce this exposure, but they depend heavily on the specific facts, the corporation's history, and current tax law. This is not something to work out after signing a letter of intent.
4. State tax exposure can follow the entity or the assets
Because Dale's practice touches Oklahoma, Texas, and Florida clients, state tax treatment is often part of this conversation. States differ in how they tax the sale of a business, and a multistate business may have exposure in more than one jurisdiction depending on where assets, employees, or operations are located.
A structure that makes sense from a federal tax perspective is not automatically the most efficient choice once state taxes are factored in.
5. Timing and installment considerations
When a deal includes seller financing, an earnout, or payments spread over more than one tax year, the timing of when gain is recognized becomes its own planning question. In some situations, sellers may be able to spread gain recognition over the years payments are actually received, rather than recognizing it all at closing.
Whether that approach makes sense depends on the seller's overall tax picture, not just the deal itself.
Tax consequences should shape the structure of a deal, not just get bolted on at the end. If you are negotiating a sale or purchase and want to understand the tax exposure before you sign anything, reach out through blgattorney.com or call my Oklahoma City office.