Tax & Structure · 11 min read
The structure of a sale often changes the after-tax outcome more than the headline price does.
Not tax advice. This is an overview of structures we see in scrap and auto yard transactions, intended to help you think about what questions to ask. Decisions about your specific situation require a CPA and a transactional attorney who know your facts.
Most sellers focus on the headline price. Sophisticated sellers focus on what lands in their account after taxes, debt repayment, working capital adjustments, transaction expenses, and any holdbacks or escrows. The structure of the deal — not just the price — often determines that number.
In an asset sale, the buyer purchases specific assets of the business: equipment, inventory, customer relationships, real estate (sometimes), and goodwill. The seller's legal entity continues to exist after closing and holds the cash. Buyers prefer asset sales because they get a stepped-up tax basis in the assets they acquire, can pick and choose which liabilities they take, and avoid most historical legal exposure.
In a stock sale (or equity sale for an LLC), the buyer purchases the ownership interests in the legal entity. The entity, with all its assets and liabilities, transfers wholesale. Sellers usually prefer stock sales because they typically result in lower tax (often long-term capital gains treatment on the entire proceeds) and avoid the "double tax" problem for C-corps.
Most scrap and auto yard sales are structured as asset sales because buyers insist on it for liability reasons — especially environmental liability. Sellers often negotiate a higher price to compensate for the worse tax outcome.
In an asset sale, the total purchase price is allocated across asset categories under IRS Section 1060. Each category gets different tax treatment:
The allocation is jointly determined by buyer and seller and reported on IRS Form 8594. Buyers prefer to allocate more to depreciable categories; sellers prefer to allocate more to goodwill. Sophisticated negotiation gets to a mutually defensible answer.
If your business is organized as a C-corp — relatively rare in scrap, but it happens — an asset sale typically gets taxed twice. Once at the corporate level on the gain. Once again when the proceeds are distributed to you as a dividend. The combined effective rate can exceed 50%.
Solutions involve advance planning: F-reorganization (converting the C-corp to an S-corp ahead of sale, then waiting out the 5-year built-in gains period), structuring the sale as a stock sale with a 338(h)(10) election, or specific allocation strategies that maximize personal goodwill (which can be taxed once, at capital gains rates, if structured carefully). None of these work on a 60-day timeline. Most require 12–60 months of planning.
S-corps and pass-through LLCs avoid the double-tax problem. For an asset sale of an S-corp, the gain is allocated to the shareholders and taxed once at their individual rates. The mix of ordinary income vs. capital gains depends on the asset allocation discussed above.
S-corp sellers often optimize through: (1) maximizing goodwill allocation, (2) breaking out personally-owned real estate from the S-corp sale to preserve favorable treatment, and (3) using installment sale treatment for portions of the proceeds.
Under IRS Section 453, a portion of sale proceeds received in future years (e.g., a seller note) can be taxed when received rather than at closing. This can spread the tax across multiple years and keep more of the proceeds in lower marginal brackets.
Notes: Installment treatment does NOT apply to ordinary income items (inventory recapture, depreciation recapture). It also does not apply if the buyer is publicly traded. For most scrap deals with seller financing or earnouts, installment treatment applies to the capital gain portion of the deferred consideration.
If you own the real estate personally (or in a separate LLC), you have options that aren't available if the real estate sits inside the operating entity:
Your 15-state footprint includes states with widely varying tax regimes. Ohio, Pennsylvania, Illinois, and Michigan all have specific rules around how gain from a business sale is sourced and taxed. If you have multi-state operations, sourcing rules determine how much of the gain is taxable in each state. Get this looked at early.
Most of the tax structures above require runway. A C-corp owner who starts thinking about tax in month 60 of diligence cannot do an F-reorg. An owner with personally-held real estate who wants a 1031 has to plan replacement property in advance. An owner who wants installment treatment on a seller note has to structure that as part of the negotiation.
The single highest-ROI thing most sellers can do is engage a transactional CPA and attorney 6–18 months before a likely closing. The tax planning often pays for itself 10–50x over.
We are not your tax advisor — that role belongs to your CPA. But the structure of the deal is a negotiated outcome between buyer and seller, and we are happy to walk through how we think about it on a confidential first call.
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