Possible for equity sale of LLC treated as asset sale for taxes?

November 20, 2024

by a searcher from University of Pennsylvania - The Wharton School in Los Angeles, CA, USA

I plan to acquire an LLC as an equity transaction, and I want to understand if it is possible to treat as an asset sale for the amortization benefit.

I am aware of section 338(h)(10), but the target is required to be a corporation, not an LLC.

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Reply by a searcher
from University of Pennsylvania in Philadelphia, PA, USA

Based on what you're describing, it sounds like you're still doing a stock purchase agreement (you would be buying LLC units in lieu of corporate shares). Unfortunately this means that you will have step up in basis of the LLC units themselves, not a step up in basis of assets nor the creation of a goodwill asset which could be amortized over 15 years.

If you're constrained to doing an asset purchase because of regulatory / contract preservation reasons or if the seller won't budget for whatever reason (usually tax benefits), you can try to negotiate down the price to split the tax benefit. Another avenue is to carve out some of the consideration to purchase "personal goodwill" of the seller but it can be tricky, only relevant in certain situations, and worth a longer conversation with a CPA / or tax lawyer.

https://www.thetaxadviser.com/issues/2014/may/payne-may2014.html

Reply by a searcher
from Northwestern University in Scottsdale, AZ, USA

Like everyone else said, it depends on how the LLC is taxed. For federal tax purposes, an LLC can be treated as a partnership, a disregarded entity (in the case of a single-member LLC), an S-Corp, or a C-Corp. In all the LLC transactions I’ve handled that were structured as stock deals, the entities were classified as partnerships.(Technically, LLCs don’t issue stocks, so these transactions are referred to as unit purchases or membership interest purchases.) In all of these, we as a buyer obtained a full step-up in basis. This step-up is achieved through negotiating and agreeing on the purchase price allocation. As a buyer, you would typically prefer to allocate higher values to tangible assets to optimize tax benefits (e.g., allocating more value to equipment that can be depreciated over 5 years rather than to goodwill, which is amortized over 15 years).

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