Buying or selling a business is one of the most significant business steps that business owners will take in their lifetime. In that process, many decisions must be made—often in a very short timeframe.
In our recently published guide, “How to Sell Your Company” (available at www.NebraskaStateTax.com), we address a variety of critical steps to be taken to sell a company.
An important area that should not be overlooked is the state and local tax and incentive impacts that come into play from buying or selling a business. Failure to consider or plan for these state and local tax and incentive impacts can have significant adverse effects.
Below we review some of the topics that all business buyers and sellers need to consider before they sign that final purchase agreement.
Potential Successor Liability
Many states, including Nebraska, have laws that can impose successor liability on the buyer of a business for sales, withholding, or income taxes that were not paid by the previous business owner. However, buyers often have the ability to request a tax clearance certificate from a state, which will assure the buyer that no unpaid taxes are due. Alternatively, if unpaid taxes are due, the state will provide that information to the buyer so the purchase price can be allocated accordingly.
Buyers should determine the states in which a business may have potential tax liabilities and then consider whether a tax clearance certificate should be requested from those states. This procedure can also help sellers, as they remain liable for unpaid taxes incurred during their ownership. Confirmation of any taxes owed—or that no taxes are due—can help bring finality for sellers.
Transfer of Incentive Projects
Many businesses have incentive projects from state and local governments based on their investment and employment in a state. For example, Nebraska offered incentives from 2005-2020 under the Nebraska Advantage Act and now offers incentives under the Imagine Nebraska Act, as well as a variety of other programs. We’ve discussed some of these programs in more detail in previous articles.
Many incentive programs can be carried on by the buyer of a company and allow the buyer access to incentives for the buyer’s continuation of the business activities in a state. However, those programs often have specific rules that must be followed for the project to be properly transferred to a buyer. In addition, both buyers and sellers need to be aware which of them may have potential liability for repaying incentives should ongoing requirements of an existing incentive
project not be met.
The concept of “nexus” refers to a state’s legal ability to impose tax on a company or individual. If a company or individual has “nexus” in a state, that means that such state can tax the company or individual.
Taxable nexus can be acquired in multiple ways, but the most typical is having physical presence in a state. Physical presence for companies means that the company has property or employees in that state. Taxable nexus can also, through recent court decisions, be acquired by having an economic presence in a state.
One of the greatest changes in business over the past few years has been the rise of remote working arrangements. For many types of employees, companies are no longer limited to hiring people in their geographic footprint. They can hire anywhere and have those employees work remotely. But, this hiring arrangement may mean that such company now has taxable nexus in the state where the remote employee is located— based on the employee’s physical presence in that state.
So, buyers should be sure they understand the locations where all employees work—including the seller’s offices and remote employees—and the implications that the locations of those offices will have on state and local taxes. The alternative is an unexpected state tax liability.
Nebraska’s Special Capital Gains Exclusion
This factor is important to business sales in Nebraska by Nebraska residents.
Nebraska’s special capital gains exclusion lets owners of many Nebraska-based corporations avoid Nebraska income tax on the sale of their corporate stock. The Legislature’s goal in enacting the exclusion was to keep corporate shareholders from leaving Nebraska before the shareholders sold their corporate stock. Many owners of Nebraska-based corporations had been leaving Nebraska for non-income tax states to avoid paying Nebraska income tax on the capital gain from that sale.
There are a number of requirements that corporate shareholders must meet to qualify for the exclusion. Each individual may elect to claim the exclusion for one corporation in his or her lifetime. The shareholder must have acquired his or her shares while employed, or on account of employment, at a corporation with Nebraska operations. Another key requirement is that the corporation must have at least five shareholders at the time of first sale or exchange for which the election to claim the exclusion is made.
If possible, sellers of a corporation’s stock will want to structure their sale transaction to take advantage of this exclusion. This generally takes planning to ensure all requirements for the exclusion are met.
Transfer Taxes on Sale of Assets
The decision to structure a transaction as the sale of stock (or LLC interests) or the sale of assets is a key decision, made for a number of factors. One factor not to be overlooked is the potential sales and use tax from the sale of assets.
For sales and use tax purposes, many states provide bulk sale exemptions for the sale, in one transaction, of the majority of assets used by one business. For example, Nebraska has such an exemption. However, some states, such as New York, have an extremely small exemption amount, which may lead to unexpected sales and use tax obligations for the buyer if the transaction is not properly structured.
In addition, some states impose transfer taxes on the value of qualifying assets sold as part of an acquisition. These transfer taxes may include real estate conveyance taxes, controlling interest transfer taxes, or other taxes that are attributable to a business acquisition. For example, Nebraska has a real estate transfer tax that may be applicable to the sale of real estate in a business acquisition.
Implications of a Changing Business Model
Many buyers purchase an existing business and intend to update its business model to better fit within the buyer’s existing business or in an attempt to expand the existing business.
Business model innovations can have significant tax implications, including whether sales and use tax is due on the business transactions following the change and how income is apportioned between states (as apportionment methods often vary based on the nature of the business being conducted).
Therefore, buyers should be sure they have considered the state and local tax implications from changing the business model of the existing business they are acquiring. Those buyers may now have to collect sales or use tax that the existing business was not required to collect. In addition, a buyer may have a very different income tax liability than the seller had.
Nick Niemann and Matt Ottemann are partners with McGrath North Law Firm. As state and local tax and incentives attorneys, they collaborate with CPAs to help clients and companies evaluate, defend, and resolve tax matters and obtain various business expansion incentives. See their websites at www.NebraskaStateTax.com and www.NebraskaIncentives.com for more information. For a copy of their full publication, “A Guide on How to Sell Your Company” or their “Nebraska Business Expansion Decision Guide,” visit their websites or contact them at (402) 341-3070 or at firstname.lastname@example.org or email@example.com, respectively.