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Main Subject - Tax Tips on a C Corp Asset Sale
First, unless you are planning on going public or have hundreds of stockholders do not form a C Corp to begin with. Use an S Corp or an LLC. If you currently are a C Corp ask your attorney or tax advisor about convertin
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
g to an S Corp. If you sell your company within a 10 year period of converting to an S Corp the sale can be taxed as if you were still a C Corp.
Here is what happens when there is an asset sale of a C Corp. The assets t
Here is what happens when there is an asset sale of a C Corp. The assets t
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
hat are sold are compared to their depreciated basis and the difference is treated as ordinary income to the C Corp. Any good will is a 100% gain and again is treated as ordinary income. This new found income drives up y
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
ur corporate tax rate, often to the maximum rate of around 34%. You are not done yet. The corporation pays this tax bill and then there is a distribution of the remaining funds to the shareholders. They are taxed a secon
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
d time at their long term capital gains rate.
Compare this to a C Corp stock sale. The stock is sold and there is no tax to the corporation. The distribution is made to the shareholders and they pay only their long term
Compare this to a C Corp stock sale. The stock is sold and there is no tax to the corporation. The distribution is made to the shareholders and they pay only their long term
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
capital gain on the change in value over their basis. The difference can be hundreds of thousands of dollars.
Secondly, keep all assets that may appreciate in value outside the C Corp and in an LLC. Your real estate, p
Secondly, keep all assets that may appreciate in value outside the C Corp and in an LLC. Your real estate, p
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
tents, intellectual property, etc. should be held in a pass through entity so you avoid the potential high C Corp corporate tax rate and the double taxation if you do an asset sale.
Let's say that you are a C Corp and t
Let's say that you are a C Corp and t
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
he buyer refuses to do a stock sale. If you can get the buyer to move as much of the transaction value to a covenant not to compete, you will be much better off. That will be taxed to you personally at the long term capi
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
tal gains rate and not the corporate tax rate and the gain can be spread out over the non-compete period.
Another approach you can use is "Personal Good Will". This is where the seller's reputation, expertise, and relat
Another approach you can use is "Personal Good Will". This is where the seller's reputation, expertise, and relat
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
onships are in effect separated from the assets of the company and account for as much of the good will value as possible from the business. So let's say that the company sells for $8 million dollars and the amount alloc
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
ated to the hard assets is $6 million. That leaves $2 million that can be classified as good will. If that good will is assigned to the C Corp, it will be taxed at the 34% rate and then taxed again when it is distributed
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
to the shareholders at 15%.
If you can move that amount to personal goodwill for the owner, it is paid directly to him and he gets taxed at the 15% rate only. The calculation looks like this: If the good will is $2 mil
If you can move that amount to personal goodwill for the owner, it is paid directly to him and he gets taxed at the 15% rate only. The calculation looks like this: If the good will is $2 mil
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
ion and is allocated to the C Corp. They pay $680,000 in corporate income taxes. The $1,320,000 remaining gets distributed to the shareholders and an additional 15% tax is paid or $198,000 for a total tax on that $2 mill
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
ion of $878,000. Moving it all to personal goodwill results in a total tax on that $2 million of $300,000, a savings of $578,000. This approach was pioneered in a classic IRS case called the Martin Ice Cream Case.
There
There
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
is a built in bias on the part of buyers with the advice of their attorneys to avoid doing stock sales because you buy everything including any hidden liabilities. You as the seller want to convince the buyer to do a st
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
ck sale by demonstrating that there are no hidden liabilities. Another argument you can use is that most contracts are not assignable without the consent of the other party. In an asset sale it could be problematic to ge
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
t assignments of a large quantity of contracts. An example is if your company is in a favorable long-term property lease the landlord will never agree to an assignment of that lease. If you have a long-term contract with
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
a government entity, a change in ownership can trigger a contract end. In a stock sale these are not issues.
There are many variables in a business sale negotiation. Price, Cash at close, Stock versus Asset Sale, and a
There are many variables in a business sale negotiation. Price, Cash at close, Stock versus Asset Sale, and a
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
location of purchase price. The IRS does not allow the buyer's allocation of purchase price to be different than the seller's. It also must be noted that from a tax standpoint, something favorable for the seller is corre
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
spondingly less favorable for the buyer. An experienced buyer will structure the deal in the most favorable way for himself. Sellers must get good advisors to help them negotiate to achieve the maximum after tax proceeds
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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