Deal Costs, Generally

Every purchase and sale of a business, whether from the perspective of the seller or the buyer, is about economics, and few items will impact the economics of the transaction more certainly or immediately than taxes. The transaction involves the transfer and receipt of value, with each party striving to maximize its economic return. The more taxes that a selling party pays as a result of the deal structure, the lower is that party’s economic return. The more slowly that a purchasing party recovers its investment, the more expensive the deal becomes.[i] Continue Reading The Transaction That Failed – Tax Treatment of Termination Fees

Escape from New York[i]

According to data released by the IRS earlier this year, the pandemic triggered a “wealth migration” that saw high-tax states like New York lose high-income earners to low-tax jurisdictions such as Florida.[ii]

This weekend, the Wall Street Journal reported that New York’s tax base shrank by $19.5 billion as a result of workers fleeing during a time when lockdown measures allowed employees to work remotely. Other high-tax jurisdictions experienced a similar exodus of workers.

Unfortunately for New York, the migration out of the State began before the pandemic, which does not bode well because, as the Office of the Comptroller recently stated, “the personal income tax is the single largest revenue source for New York, accounting for two of every three tax dollars.” Continue Reading Statutory Residence in New York: Time to Rethink the “Permanent Place of Abode” Test?

Economic Downturn?

The Federal Reserve’s Open Market Committee announced last week that it would raise the Fed’s baseline interest rate by 0.75 percentage points, the largest such increase since 1994.

The Fed’s move came in the wake of the Labor Department’s earlier announcement that the consumer price index (a measure of inflation) rose by 1 percent last month, and by 8.6 percent for the past 12 months, the highest rate of inflation since 1981. Following the release of the inflation figures, all the major domestic stock indices plummeted.

As a result of the foregoing, combined with the geopolitical uncertainty arising from the war in Ukraine, the continued supply chain issues (exacerbated by China’s ongoing difficulty with Covid), and other related factors, many economists and business owners are anticipating a recession.[i] Continue Reading Will An Economic Downturn Lead to An Increase in Tax-Related Whistleblowing?

The Housing Market[i]

During the first quarter of 2022, the housing market accounted for 16.7 percent of gross domestic product (“GDP”).[ii] This figure represents a return to historic norms following the substantial reduction in housing’s share of GDP after the Great Recession.

The reasons cited for the increase include the imbalance in supply and demand for housing, which itself resulted from the reduction in inventory following the 2007-2009 recession and the housing bubble burst[iii] and the recent wave of millennials who, encouraged by what has been until now a low interest rate environment created by the Federal Reserve in response to the pandemic,[iv] have been looking to purchase their first homes.[v]
Continue Reading Either An Investor or a Dealer Be – That is the Question

A More Cautious Approach

Compared to the torrid pace of M&A transactions last year,[i] the current year seems rather pedestrian. That is not to say businesses are not being sold; they are. The purchase and sale of a business is one of the natural alternative paths in the evolution of the business.[ii]

However, the environment in which buyers and sellers are now considering their options and the manner in which they are approaching one another seem to have changed; one might say they are generally being more cautious, notwithstanding that the economy apparently remains strong by many measures. Continue Reading The Earnout: Contingent Purchase Price or Compensation?

Don’t Do It

There are certain generally accepted “dos and don’ts” of which almost every investor is certainly aware. For example, do not put all your eggs in one basket; if an investment seems too good to be true, stay away from it; take a long-term approach; etc. These guidelines are so obvious, they have become cliché.

However, based upon my recent experience, it seems too many investors in real property have yet to understand that, in the overwhelming majority of cases, they should not acquire real property in a corporation, even one that has elected to be treated as an S corporation. These investors and their successors will often pay the consequences of this misstep for many years. Continue Reading An S Corporation’s Sale of Real Property Following the Death of Its Shareholder

State Finances

Much has been written over the last few weeks about the unprecedented financial cushion that many states have accumulated thanks to federal support prompted by the pandemic and larger-than-expected tax revenue.[i]

However, in the last few days we have started to hear warnings from various sources that state economic forecasts for the remainder of 2022 and for 2023 are likely to be revised downward; for example: “The current global geopolitical crisis, continued uncertainties related to the ongoing pandemic, high inflation, and evolving federal monetary policy could all muddle the revenue outlook for the states.”[ii] Add to that the expiration of federal aid programs, the volatility of the stock markets, and talk of recession.[iii] Continue Reading Will New York Be Looking At Your Federal Tax Return? Probably

Sale of the Business

Imagine Client has just received an attractive, all cash offer[i] for the sale of their business; there is no financing contingency.[ii] The buyer has proposed a cash-free and debt-free deal.[iii] The only post-closing adjustment to the purchase price will be for net working capital;[iv] for example, there is no earnout based upon the post-closing performance of the business. Subject to further diligence, the buyer expects that a portion of the purchase price will be held in escrow by a bank for a stated period[v] to secure the client’s general indemnity obligations with respect to its representations and warranties in the purchase and sale agreement.[vi] Other than the net working capital adjustment and the escrowed amount, the entire purchase price will be payable at closing.

Before accepting the offer, Client – to its credit (and to your relief) – asks that you explain the tax consequences of the proposed transaction; specifically, how much will Client net from the sale on an after-tax basis?[vii]

Continue Reading Selling Your Business? Take the Money But Defer the Tax?

Limited Liability?

Many individual taxpayers who invest in a closely held business, including one organized as a corporation, fail to appreciate there are circumstances in which they may be held personally liable by a state or local taxing authority for the sales tax collected or required to be collected by the business.

In other words, if certain criteria are satisfied, the limited liability protection that an individual shareholder would normally enjoy as a matter of state corporate law, and which they may have assumed – not unreasonably – would shield them from personal responsibility for any and all liabilities of the corporation, including taxes, will be of no avail even where the shareholder has respected the separate legal status of the corporation.[i] Continue Reading Shareholder Beware: Personal Liability for N.Y. Sales Tax

An often-explored theme of this blog is the frequency with which similarly situated owners of similarly situated closely held business, facing a similar set of economic circumstances, and presented with a similar set of choices, will repeat the mistakes made by countless taxpayers before them.[i]

Rational behavior? Does the answer depend upon the taxpayer’s appetite for risk-taking? Being an entrepreneur necessarily involves some exposure to risk. However, there is a difference between the calculated risk that an intelligent business owner knowingly takes, on the one hand, and the risk that comes with negligently disregarding well-established tax principles, on the other. Continue Reading Unreasonable Compensation As Constructive Dividend, Redux