The buyer is demanding we agree to an asset sale for tax step-up purposes, but we are an S-Corporation and want to avoid double taxation. How do we utilize an F-Reorganization structure to give the buyer their tax benefits while preserving our single level of taxation and protecting our net proceeds?

Question

Tyler Smith · Accepted Answer

When selling an S-Corporation, a buyer often insists on an asset sale to secure a step-up in tax basis, which allows them to write off the purchase price through depreciation. However, this structure can trigger massive tax liabilities for you, especially if you have significant depreciation recapture.

To break this deadlock, propose an F-Reorganization. This corporate transaction structure allows you to form a new parent S-Corporation and convert your existing operating company into a single-member limited liability company.

For tax purposes, the transaction is treated as an asset sale for the buyer, giving them the coveted tax step-up they want. For you, the seller, the transaction is treated as a stock sale, allowing you to enjoy favorable long-term capital gains tax treatment and avoid the double taxation associated with selling assets.

Using this structure requires precise execution, so you must treat the transition as a key corporate Rock. Delegate the legal and accounting coordination to a qualified transaction advisory seat on your Accountability Chart to ensure every step is completed flawlessly before closing.

By offering an F-Reorganization, you remove a major negotiation hurdle. You give the buyer exactly what they need while protecting your net after-tax proceeds, keeping your transaction moving forward without costly delays.