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Partnership Tax Basics, Part 1: Initial Investment & Operational Framework

Nick Eusanio, Esq., LL.M. Leave a comment

By Nick Eusanio & Jared Boswell

A partnership is one of the most common business structures in the United States because it provides strong flexibility to investors and operators. But that flexibility comes with technical rules that can create unexpected tax outcomes if not structured carefully. This article is the first in our Partnership Tax Basics series, focused on the partnership classification for tax purposes.  Below is an overview of the versatility and governing fundamental U.S. federal income tax principles associated with initial investment in, and operation of, partnerships.

TL; DR Highlights

  • Partnerships are commercially flexible and customizable for investors and operators.
  • Tax is generally paid once—at the partner level.
  • Most contributions are tax-deferred, but exceptions can trigger immediate tax.
  • Liability allocation can directly impact each partner’s tax basis and deductions.
  • Contributions of built-in gain property require special tracking and allocation.

Flexbility of the Partnership Form

A key advantage to the partnership form is the flexibility it affords the parties in structuring the arrangement. Subject to certain tax and legal guardrails, some of these points of flexibility include: investor/partner type (individual or legal entity), contribution type (cash, property, services and minority vs. controlling) and impact (nonrecognition), profit and loss allocations, distributions (timing, type), single level of taxation (partner level only), and exit strategies.

What is a Partnership for Tax Purposes? Entity Classification (Default Rules & Check-the-Box Election)

For tax purposes, a partnership is a flow-through entity. The partnership itself does not pay federal income tax. Instead, income, deductions, and credits flow through to the partners (via reporting on Schedule K-1), who report them on their individual returns.

Generally, if an unincorporated U.S. business entity (i.e., a limited liability company (LLC) or state law partnership) has more than one owner, it is automatically classified as a partnership for federal income tax purposes under the default classification rules of Treas. Reg. § 301.7701-3(b)(1). This is true also for a venture between multiple parties even if the parties have not formed a legal entity to carry on the business. But the owners of an unincorporated U.S. business entity can elect a different classification (e.g., corporation) under Treas. Reg. 301.7701-3(c) than the default by filing Form 8832 with the IRS. The rules governing non-U.S. entities, as well as other available elections (e.g., S corporation status via Form 2553) are beyond the scope of this article.

Section 721(a) – General Nonrecognition Rule

Section 721(a) generally provides that no gain or loss is recognized to a partnership or any of its partners on contribution of property to the partnership in exchange for an interest in the partnership. For example, assume Partner A contributes $1 million and Partner B contributes $10 million to a partnership, and each receives a 50% interest in the partnership. There is an economic mismatch because each partner receives a 50% interest while contributing significantly different amounts of capital. Despite this economic disparity,  Section 721(a) generally dictates that no gain or loss is recognized to the partners or the partnership on this transaction, because cash (property) was exchanged for partnership interests. This flexibility allows investors to negotiate economics freely without triggering immediate tax—even where ownership percentages and capital contributions don’t align. That said, other partnership tax rules (such as those governing maintenance of capital accounts for each partner) operate to align the ultimate economic and tax impacts of such an arrangement.

As another point of versatility, Section 721(a) is by its terms more accessible to investors than similar tax-deferred contribution provisions found elsewhere in the Code. For example, Section 351 is an analogous nonrecognition provision in the corporate context. Section 351 generally requires that a transferor (or group of transferors) of property to a corporation have 80% or more of the ownership of the corporation immediately after contribution to qualify for nonrecognition. Section 721(a) is much more permissive because there is no such control requirement for contributors to a partnership. This framework allows multiple investors to contribute property to a partnership in exchange for a partnership interest on a tax-deferred basis, regardless of the resulting ownership structure. This mechanic facilitates unrelated minority investor contributions without immediate tax impact.

Exceptions to Section 721(a)

Although the general rule of Section 721(a) is nonrecognition, the facts and mechanics of partnership formation and operation can create potential tax issues without careful attention to detail and planning.

  • Definitional Exception – Exchange of Partnership Interest for Services

The general nonrecognition rule of Section 721(a) does not apply to the receipt of a partnership interest in exchange for services, because services are not property. Under Section 83(a) and Treas. Reg. § 1.721-1(b)(1) such a “sweat-equity” arrangement may give rise to ordinary income to the partner at the time the partnership interest is issued. This depends on whether the partnership interest received constitutes a capital interest (taxable as ordinary income / compensation at the time of issuance per Treas. Reg. § 1.721-1(b)(1)) or a profits interest (to which Rev. Procs. 93-27 and 2001-43 and / or a protective Section 83(b) election apply, not taxable at the time of issuance and potential long-term capital gain treatment on subsequent sale of the interest). Stay tuned for more in a future article on this complex topic.

  • Investment Company Exception – Section 721(b):

Section 721(b) provides that the general nonrecognition rule doesn’t apply to a transfer of property to a partnership which would be treated as an investment company within the meaning of Section 351(e), (i.e., a company holding as assets stocks and securities making up 80% of the value of its total assets). In that case, application of Section 721(b) triggers recognition of gain on contribution of the property.

  • Appreciated Property & Related Foreign Partners Exception – Section 721(c):

Section 721(c) may require immediate gain recognition in certain situations where a U.S. transferor contributes appreciated property (i.e., property with a FMV exceeding its basis) to a partnership that includes related non-U.S. partners. The Gain Deferral Method rules (Treas. Reg. § 1.721(c)(3)), if properly followed, can permit the U.S. transferor to defer recognition of such built-in gain over time rather than recognizing it immediately in such a scenario. These rules are intended to prevent the shifting of built-in gain outside the U.S. tax system.

  • Disguised Sales – Section 707(a) & Treas. Reg. § 1.707-3:

The “disguised sale” rules of Section 707(a) and Treas. Reg. § 1.707-3 can also override the general nonrecognition rule of Section 721(a). If a partner transfers property to a partnership and receives cash or other consideration from the partnership in a related transaction, the transaction may be treated as a disguised sale and trigger gain recognition to the partner. Under Treas. Reg. § 1.707-3(c), a transfer occurring within two years of the contribution is presumed to be a sale unless facts and circumstances clearly establish otherwise. But transfers after two years are presumed not to be a disguised sale under Treas. Reg. § 1.707-3(d). So, a transaction whereby Partner A and Partner B are entering the partnership to transfer cash from Partner B to Partner A, is expected be categorized as a disguised sale.

Partner Basis and Liabilities (Section 722 & Section 752)

Basis is important in determining the amount of gain or loss, if any, on a taxable disposition of a partnership interest (outside basis) or partnership assets/property (inside basis).

  • Outside Basis

If a contribution satisfies Section 721(a), the partner is expected to have outside basis consistent with the contribution’s adjusted basis at the time of the contribution under Section 722. Such basis is increased by any gain recognized under Section  721(b) to the contributing partner at the time of contribution, and by the amount of partnership recourse liability assumed by the partner.  In our continuing example, Partner A would have $1 million of outside basis and Partner B would have $10 million outside basis (i.e., basis in their respective partnership interests) on contribution. To the extent Partner A and Partner B are subject to partnership liabilities (such as loans), each partner’s outside basis is increased by the partner’s relative share of such liabilities under Section 752 (assuming the liabilities are recourse liabilities for which the partner assumes the economic risk of loss under Treas. Reg. § 1.752-2).

Whether a liability is recourse or nonrecourse affects how it is allocated for a partnership tax purposes. A recourse liability is allocated to the partner who bears the economic risk of loss with respect to the liability. A nonrecourse liability is allocated among the partners based on their respective shares of partnership minimum gain and Section 704(c) gain, with any residual according to their profit-sharing ratios under Treas. Reg. § 1.752-3.

  • Inside Basis

Under Section 723, the inside basis of a partnership asset is the adjusted basis of such asset to the contributing partner at the time of the contribution, increased by the amount of any gain recognized under Section 721(b) to the contributing partner at that time.

Capital Accounts – Section 704(b) and Treas. Reg. § 1.704-1(b)(2)(iv)

Maintenance of capital accounts for partners is an important requirement set forth in Section 704(b) and Treas. Reg. § 1.704-1(b)(2)(iv). Capital accounts track a partner’s net equity in a partnership and are used to support tax allocations and determine economic rights and tax impacts of distributions, transactions and liquidation. A partner’s initial capital account balance generally matches the partner’s initial contribution. Thereafter, certain adjustments are made to the capital account balance of each partner based on future contributions, allocations of income, loss and deduction, distributions, and other items of the partner or partnership as set forth in the regulations. The rules governing maintenance of capital accounts are complex and beyond the scope of this article. But, generally, these rules aim to ensure that any allocation of income, gain, loss, deduction or other partnership item to a partner has substantial economic effect (loosely meaning that the tax impacts of the allocation align to the economic reality of the arrangement).

Built-In Gain Property and Section 704(c)

The type of property contributed to a partnership can have special impacts to the relevant partner capital accounts. For example, contribution of real property can create differences in the book value versus the tax value of capital accounts (i.e., a book-tax disparity). Adjusting our prior example, assume Partner A contributes $1 million in cash, but Partner B now contributes real property worth $10 million (having an adjusted basis of $5 million) to the partnership, each in exchange for a 50% partnership interest. The general nonrecognition rule still applies, such that no gain or loss is recognized on these contributions. But Partner B’s contribution of real estate having a $10 million FMV and $5 million adjusted basis (i.e., a book-tax disparity from appreciated property) creates built-in gain subject to Section 704(c). This built-in gain is attributable to Partner B and is reduced over time through book and tax depreciation differences. Notably, attribution of the Section 704(c) layer may differ based on the allocation method chosen by the partners in the partnership/operating agreement. Common methods include the traditional method, traditional with curative method, or remedial method. Each method has advantages and disadvantages, which are beyond the scope of this article and should be discussed with a tax professional before deciding which method is appropriate.

Special Deductions: Section 199A for Qualified Business Income

In addition to various points of flexibility, the partnership form now offers the potential to access the special tax deduction set forth in Section 199A. Section 199A was implemented in 2017, as part of the Tax Cuts and Jobs Act (TCJA), to better align effective tax rates of the pass-through business forms (like partnerships) with those of the corporate form (21% since TCJA). The Section 199A deduction is available for eligible partners of domestic partnerships for tax years beginning after December 31, 2017. Section 199A permits individuals, trusts and estates with pass-through business income to deduct up to 20% of qualified business income (QBI) from their taxable income. Importantly, eligibility for the Section 199A deduction is subject to various limitations beyond the scope of this article and should be evaluated with a tax professional.

Closing

The tax-deferred nature of a partnership formation is advantageous to investors and allows broad flexibility in the amount and type of capital contributed, number and type of investors, and the terms governing the partners’ economic arrangement and the partnership’s operations. Legislative changes like Section 199A aimed at achieving partnership to corporate tax rate parity have also improved the economics of the partnership business form. As a result, the partnership tax classification is used frequently by private equity groups investing in operating companies and joint ventures, real estate investors developing their portfolios, and by local entrepreneurs pursuing business ventures. Structural and economic versatility make the partnership tax classification an attractive choice for a diverse investor base.

Coming Next

Partnership Tax Basics, Part 2: Sale of a Partnership Interest: In our next article, we’ll examine the tax consequences of sale of a partnership interest to both the partnership and the partners.

Connect with Nick Eusanio, Tax Planning & Compliance Partner at DBL Law and Jared Boswell, Tax Planning & Compliance Associate at DBL Law, to learn how proper investment or transaction structure and tax planning can help you achieve the desired outcome.

Why Should You Hire a Tax Attorney Alongside a CPA?

Nick Eusanio, Esq., LL.M. Leave a comment

Key Takeaways

  • It’s not CPA vs. Tax Attorney, it’s CPA plus Tax Attorney.
    CPAs typically handle tax compliance (return preparation and filing) and planning; Tax Attorneys help structure and support planning and compliance positions on the front end, and provide defense and legal counsel when risk and complexity arises on the back end.
  • Bring in legal counsel before problems arise.
    The biggest value of a Tax Attorney is often proactive; structuring transactions, documenting positions, and advising on strategies to avoid or mitigate exposure up front.
  • Controversy changes everything.
    If you’re facing tax audit, examination, investigation, dispute, controversy, or potential litigation, a Tax Attorney helps protect your position—both strategically and through privilege.

Many individuals and businesses view a CPA as the go-to for tax planning, filings, and financial strategy. But in most scenarios (other than those involving simple individual tax compliance involving W-2 income only), involving a Tax Attorney with your CPA is a best practice. In complex or high-risk situations, hiring a Tax Attorney alongside your CPA can be critical.

Here are some key moments when Tax Counsel should be part of your team:

Tax Controversies & Disputes

If you’re facing a tax audit, examination, investigation, controversy, or dispute with a taxing authority, a Tax Attorney helps protect your position and guide strategy, through tax technical, factual background development, and procedural levers. Just as importantly, attorney-client privilege offers protection that doesn’t exist through a CPA, especially in sensitive matters that may involve criminal allegations.

Criminal Investigations & Litigation

If a tax issue involves criminal investigation and / or escalates to litigation, a Tax Attorney is essential. Tax Counsel protects privilege of attorney-client communications and manages investigations, court proceedings, and defense strategy (again, focused on tax technical, factual background development, and procedural levers), while your CPA provides valuable financial expertise.

Major Transactions & Tax Positions

Before executing a significant transaction, or taking a complex tax position, a Tax Attorney can help structure the deal and provide legal documentation to support your position. Often, structuring a transaction involves one or more of the following: choice of legal entity, implementation of new agreements, restructuring of existing legal entities or agreements, or written tax opinions supporting key tax positions. All these decisions involve tax technical analysis, tax efficiency, legal considerations, and legal drafting.

A Tax Attorney is uniquely qualified to advise and execute on all these matters, ideally in collaboration with a trusted CPA. A CPA can’t form legal entities, draft agreements, or advise as to legal effects or implications of those items. But, combining these unique strengths and abilities of a Tax Attorney with those of a CPA (financial and tax modeling, for one) is a proactive approach that can be a game changer in bolstering your position and reducing risk.

The Verdict: Tax Attorney-CPA Team Approach is Best

It’s not CPA versus Tax Attorney; it’s CPA plus Tax Attorney. The strongest outcomes come from collaboration—combining financial insight with legal strategy to create a plan that is effective, efficient, and defensible.

Bottom line: If your situation involves complexity, risk, or potential dispute, it’s worth involving a Tax Attorney early. The right team doesn’t just solve problems; it helps you avoid them altogether while achieving desired outcomes.

Nick Eusanio holds an LL.M. in Taxation and has worked in public accounting firms alongside CPAs on complex tax compliance and planning matters, bringing both legal insight and practical tax experience to sophisticated transactions and disputes.

Inbound Investor U.S. Tax Playbook, Part 2

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Structuring the Investment — Entity Choice & Tax-Efficiency

The United States is one of the most attractive places for foreign capital — deep markets, relative stability, and strong investor Once an inbound investor decides to enter the U.S. market, the next decision — how to structure the investment — can drive the ultimate tax result significantly. The U.S. system taxes differently depending on the type of entity, its ownership, and whether treaty benefits apply.. But the U.S. also has a uniquely complex tax environment.

This article summarizes considerations for entity selection, including notation of federal, treaty, and state regimes, and practical planning points.

1. Balancing Tax Efficiency, Liability Protection & Compliance

Every inbound structure should balance three objectives:

  1. Liability protection — containing business legal risk within the U.S. entity.
  2. Tax efficiency — minimizing both U.S. and home-country tax leakage.
  3. Administrative manageability — minimizing annual administrative tasks and costs.

While the right structure depends on the investor’s facts — activity and income type, treaty position, and cash planning — there are key guardrails to consider.

2. Basic Options: Direct or U.S. Blocker, Foreign Holding Company Considerations

A. Direct Investment by the Non-Resident

This is the simplest on paper — the investor (either a foreign individual or foreign holding company) directly holds the U.S. asset, partnership interest, or LLC (treated as a partnership or disregarded for tax purposes) interest.

  • Tax result: The investor is directly subject to:
    • U.S. tax on ECI and FDAP (with related withholding)
    • Branch Profits Tax (if foreign corporation owner)
    • FIRPTA (if any disposition of USRPI or USRPHC)
    • U.S. estate tax on U.S.-situs assets (if foreign individual owner)
    • Annual filing requirements for Form 1040-NR (individuals) or Form 1120-F (foreign corporations).
      • May require additional U.S. filings at entity level (e.g., U.S. partnership or LLC treated as partnership required to file Form 1065, related Schedules K-1 and Forms 8804 / 8805 / 8813 (withholding statements) issued).
    • Pros: No interposed entity unless desired (e.g., partnership, LLC); may reduce foreign-country complications.
    • Cons: Exposed to above-noted U.S. filing obligations and taxes and potentially no legal liability protections that would exist with a corporate structure (unless using U.S. LLC).
    • Potential use case: Small passive investments or treaty-protected portfolio holdings.U.S. “Blocker” Corporation (or LLC treated as a corporation for tax purposes)

B. U.S. “Blocker” Corporation (or LLC treated as a corporation for tax purposes)

A common approach for institutional or fund investors. The foreign investor capitalizes a U.S. C-corporation to hold the operating business, real estate, partnership or disregarded LLC interest.

  • Tax result / Pros:
    • The Blocker “absorbs” ECI, paying 21% corporate income tax.
    • When profits are distributed, they are dividends subject to 30% withholding under IRC §881 (often reduced by treaty).
    • Avoids the Branch Profits Tax that would otherwise apply to a foreign corporation’s U.S. branch.
    • Potential insulation from FIRPTA (or ability for same with additional tiered structuring).
    • Simplifies compliance — the foreign owner does not file Form 1120-F or 1040-NR; only the U.S. corporation files Form 1120 (and partnership files Form 1065 if there is a U.S. partnership in the structure).
  • Con: “Double” taxation — once at the corporate level and again on distribution — though effective rates can be moderated by treaty reductions or reinvestment strategies.

3. Withholding Tax & Using Treaties Strategically (Without Over-Engineering)

The U.S. imposes withholding tax on most payments to foreign persons, such as: dividends, interest, royalties, rent, service fees, and deemed branch remittances (DEA). This withholding tax is generally levied at a statutory rate of 30%, unless reduced by treaty. U.S. payors are responsible for withholding and reporting this tax via Form 1042 / 1042-S. Failure to withhold properly can shift liability for the original tax, plus penalties and interest, to the payor as withholding agent.

Treaties can dramatically reduce withholding and sometimes exempt outbound payments or business profits from U.S. taxation altogether.

Checklist for claiming treaty benefits:

  1. Confirm investor’s residency certificate from home jurisdiction.
  2. Evaluate specific treaty qualification articles (residency, dividends, interest, royalties, business profits, etc.).
  3. Evaluate Limitation on Benefits (LOB) treaty article — are applicable requirements (such ownership and / or activity tests) satisfied?
  4. Issue Form W-8BEN or W-8BEN-E to payor(s).
  5. Disclose treaty position on Form 8833 if taking a treaty-based return position required to be reported.

4. Financing the U.S. Operation: Debt vs. Equity

Foreign investors often capitalize U.S. ventures through related-party debt, seeking to deduct interest while repatriating profits as interest payments (often subject to lower withholding than dividends).

Consideration:

  • Debt / equity analysis (common law, and IRC §385 if applicable): Debt can be reclassified as equity, disallowing deductions and potentially creating other unintended tax impacts in certain structures.
  • IRC §163(j) (generally applicable to taxpayers with average annual gross receipts of $30 million+) limits interest deductions to 30% of adjusted taxable income.
  • IRC § 267 loss disallowance and matching rules regarding timing of deduction and income recognition for accrued but unpaid interest between related parties.
  • IRC § 267A deduction disallowance for interest (and royalty) payments to related parties in hybrid transactions or with hybrid entities if the payment isn’t included int eh recipient’s income under foreign tax law.
  • Withholding: 30% on interest, unless reduced by treaty or portfolio interest exemption applies.
    • Branch context: If the foreign corporation operates a U.S. branch, adjustments under Treas. Reg. §1.884-4 apply to determine the portion of deemed interest also subject to BPT at 30% (unless reduced by treaty), if any (i.e., the amount of excess interest not apportioned to ECI taxed at 21%).
  • Base Erosion and Anti-Abuse Tax (BEAT) under §59A, which targets large corporations (generally those with $500 million+ in average annual gross receipts) making base-eroding payments like interest to related foreign parties.
  • Documentation: Written loan agreements, arm’s-length terms and pricing / interest rates, contemporaneous intercompany pricing support.

5. State Tax Structuring Overlay

States have their own tax bases, nexus thresholds, and combination rules. Depending on the investment type and amount, and the state or states involved, state tax can be a material consideration.

Key Concepts:

  • Nexus: Physical presence (property, payroll) or economic nexus from sales into a state.
  • Separate vs. Combined Filing:
    • Some states tax entities separately.
    • Others (e.g., California, New York, Illinois) require or permit combined/unitary reporting for related entities.
  • Water’s-Edge Elections:
    • Limit the combined group to U.S. members (and certain CFCs).
    • Usually binding for 7 years (Cal. Rev. & Tax Code §25113).
    • Must be modeled carefully — including impacts on foreign tax credit planning and apportionment.

Practical tips:

  • Where possible, isolate U.S. operations in one entity (or the fewest otherwise necessary entities) per state nexus profile.
  • Consider flexibility in deployment of property / assets, debt, and people in context of state credits and incentives, state apportionment, net worth tax, and separate vs. combined or unitary reporting rules.
  • Evaluate broader U.S. legal entity structure in multi-state operating structures (e.g., corporate holding company with use of wholly-owned disregarded / flow through LLCs or subsidiary corporations) for potential state tax planning or simplification.

6. Key Takeaways

  • Start with cash return in mind. Structure for efficient repatriation.
  • Contain ECI. Blockers or treaty planning can reduce compliance and tax cost.
  • Limit BPT exposure. It’s often the hidden double tax.
  • Remember FIRPTA. Structure real estate holdings to avoid FIRPTA.
  • Treaty benefits aren’t automatic. Evaluate, document, and claim them properly.
  • Don’t ignore state rules. Multiple states with differing rules can complicate matters, determine materiality and perform tax impact diligence and identify opportunities accordingly.

A well-planned structure can provide legal protections and tax efficiencies.

Coming Next

Part 3: Operating and Repatriating Profits: In our next article, we’ll explore what happens once the investment is operational: withholding regimes, filing obligations, profit distributions, and how to repatriate capital without triggering unnecessary tax.

Missed Part 1? Read it here.

Thinking about investing in the U.S.? Start with a consultation to evaluate your company’s readiness and identify strategies for success. Connect with Nick Eusanio, Tax & Compliance Partner at DBL Law, to learn how proper tax planning and investment structure can help you achieve the best possible outcome.

Business Sale Basics, Part 4: Close & Integrate or Transition

Nick Eusanio, Esq., LL.M. Leave a comment

Closing a business sale is just the beginning. Learn how to manage integration or transition effectively to protect and drive value in Part 4 of our Business Sale Basics series.

Closing the sale is a major milestone, but it’s not the end of the journey. Proper planning for integration or transition ensures long-term success for both you as the seller and the buyer. Again, due consideration for these matters has already been given in Part 2 of our series (Structure the Sale).

Post-Closing Considerations

1. Integration / Transition Planning

Clear documentation in one or more appropriate agreement(s) is key to ensuring the intended transition mechanics. Consider the following factors when drafting appropriate documentation.

  • How and when the buyer will assume operations.
  • How and when will the owner / seller notify existing employees, customers and vendors / suppliers of the sale? What steps are necessary to ensure business continuity for these groups?
  • Whether and what level of involvement the owner / seller will continue to have in the company and for what time period.
    • If the owner / seller remains involved:
      • What type and level of pay and benefits will be continuing?
      • Will the owner / seller retain any percentage ownership in the equity of the company (i.e., a rollover interest)?
    • If the owner / seller is exiting:
      • Address any interim transition period / consulting arrangement, earn-out, or other phased exit plan.

2. Tax and Regulatory Compliance

Post-closing reporting is just as important as pre-closing planning. Consider the following compliance items after closing.

  • Required tax filings for the transaction.
  • Required industry / regulatory filings for the transaction.
  • Tracking for installment sale payments or deferred compensation.

3. Avoiding Post-Closing Disputes

A seller who has successfully navigated the process following our Business Sale Basics: 1. Prepare the Pieces, 2. Structure the Sale (Legal & Tax), 3. Align Team, Finance, & Industry Factors can expect to be in good position to avoid post-closing disputes. Below are some key factors expected to be in place and continuing to achieve that goal.

  • Keep documentation clear to reduce claims risk.
  • Follow through on representations and warranties.
  • Maintain open communication with the buyer during transition.

Thinking about selling your business? Start with a pre-sale consultation to evaluate your company’s readiness and identify strategies to preserve and maximize value. Connect with Nick Eusanio, Tax & Compliance Partner at DBL Law, to learn how proper tax planning and deal structure can help you achieve the best possible outcome.

Business Sale Basics, Part 3: Align Team, Finance, & Industry Factors

Nick Eusanio, Esq., LL.M. Leave a comment

Employees, financing, and industry / regulatory factors can make or break a business sale. Learn how to address these critical elements in Part 3 of our Business Sale Basics series on Aligning these Factors.

Business sales are more than numbers on a balance sheet. Employees, financing, and industry-specific regulatory considerations play a critical role in the success of a transaction. Well-prepared sellers project credibility and value by aligning these items in the deal. This article serves as a continuation of Part 2 of our series (Structure the Sale), as each of these factors is important in structuring the transaction.

1. Employee & Management Factors

Retaining key employees and ensuring the business isn’t overly tied to the selling owner are often key factors for buyer confidence and demonstrating value. A thoughtful seller should align these factors in the deal by considering the items below.

  • Invest the necessary training time and resources to improve management team business / technical capabilities and integration with operations personnel and customers to reduce dependency on the owner.
  • Document steps to accomplish the above and ideally matching metrics to substantiate the value retained or created, for sharing with the buyer team.
  • Ensure key management and operations team members are valued in the deal by negotiating appropriate provisions for continuing employment including roles and levels of salary, benefits and bonuses. Don’t forget to provide for any special items like remote versus on-site work, parking, company phones and cars, or similar benefits.

2. Financing the Transaction

Understanding the buyer’s funding method for the deal is important to both timing and negotiations. Below are some key points to consider with respect to financing, timing and related negotiations.

  • Bank / 3rd party financing versus seller financing.
  • For seller financing, a well-crafted promissory note and security agreement with appropriate collateral are key considerations.
  • Be aware of potential covenants or guarantees, particularly any ‘earn-out’ provisions.

3. Industry and Regulatory Factors

Various industries have unique licensing, permitting, regulatory or other compliance requirements that can impact a sale. Heavily regulated industries like health care, financial services / banking, or insurance may require specific disclosures or approvals. Below are some key items to consider from an industry / regulatory perspective.

  • Review licensing, permits, and regulatory compliance requirements for your industry.
  • Understand other regulatory frameworks that may apply based on the type (e.g., cross-border transaction, involvement of sensitive information or data, etc.) or value of the transaction (for instance, anti-trust, securities, cybersecurity and infrastructure security, export control system, foreign investments, etc.).
  • Ensure necessary additional documents or agreements are prepared and negotiated as part of the sale based on applicable regulatory regimes.

Thinking about selling your business? Start with a pre-sale consultation to evaluate your company’s readiness and identify strategies to preserve and maximize value. Connect with Nick Eusanio, Tax & Compliance Partner at DBL Law, to learn how proper tax planning and deal structure can help you achieve the best possible outcome.

Business Sale Basics, Part 1: Prepare the Pieces

Nick Eusanio, Esq., LL.M. Leave a comment

Learn the essential steps to get your business ready for sale, from organizing financials to planning for taxes, in this first installment of our Business Sale Basics series: Prepare the Pieces.

Preparation is the foundation of any successful business sale. Owners who take the time to get their company “deal-ready” often sell faster, for more money, and with fewer surprises and snags. This post covers key steps to prepare your business before putting it on the market.

Key Steps to Prepare

1. Organize Financials & Records

Accurate and well-organized financials are critical. Buyers generally want to review at least three years of statements, so savvy sellers should review and organize the following items (ideally in a centralized digital data room or diligence binder).

  • Accounting records (P&L, Balance Sheet, etc.) in current, accurate, and reconciled form (preferably with assistance of a professional accountant / CPA).
  • Corporate documents: articles, bylaws, operating agreements, meeting minutes and resolutions.
  • Contracts, leases, permits, licenses and intellectual property documentation in a centralized file.

2. Identify & Address Risks & Liabilities

Buyers are highly sensitive to hidden liabilities and risks. A smart seller should conduct a fresh risk assessment for potential yet-uncovered issues, as well as identifying and listing known disputes, litigation, and liabilities. Below are some key areas for review and assessment. Once identified, a prepared seller should form a plan to resolve or address each item of risk or liability.

  • Confirm company and asset (real estate, operating assets, intellectual property, permits, licenses, etc.) ownership records reflect reality.
  • Resolve disputes with minority owners.
  • Review buy-sell agreements and stock restrictions, as well as employment agreements and restrictive covenant (nondisclosure / noncompetition / non-solicitation) agreements for key personnel.
  • Evaluate tax accounts (federal, state and local).
  • Consider any zoning, environmental, or other industry-specific regulatory issues.

4. Optimize Operations & Team Readiness

Buyers are often acquiring more than the business – they may also be taking the team that’s in place. As with all team-based pursuits, performance and value is heavily dependent on each team member and the process in place. A strong seller should take the steps below to improve the company’s team and methods prior to sale.

  • Invest in management team business / technical capabilities and integration with operations personnel and customers to reduce dependency on the owner.
  • Review key customer and vendor contracts to align the proper internal personnel and processes for continued success.
  • Identify (and improve, where necessary) and document processes and systems to demonstrate stability.

5. Plan for Taxes Early

The tax structure of a sale can significantly impact a seller’s net proceeds. Early planning allows you to evaluate whether an asset sale, stock sale, or other structure is most favorable. A savvy seller should begin by considering the following tax matters.

  • Alternative deal structures and impacts on taxes (asset sale, stock sale, or stock sale treated as an asset sale for tax purposes?)
  • Evaluate potential tax elections as relevant (e.g., IRC §§ 338(h)(10) or 336(e)).
  • Consult with a tax advisor to identify potential tax issues and opportunities, and improve tax efficiency of the deal.

Thinking about selling your business? Start with a pre-sale consultation to evaluate your company’s readiness and identify strategies to preserve and maximize value. Connect with Nick Eusanio, Tax & Compliance Partner at DBL Law, to learn how proper tax planning and deal structure can help you achieve the best possible outcome.

OBBBA, Explained: What the “One Big Beautiful Bill Act” Means for Businesses,Funds, and Founders

Nick Eusanio, Esq., LL.M. Leave a comment

On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) became law, reshaping several core business tax rules, including those in the incentives and international tax landscapes. Below is a concise guide to the provisions most likely to affect closely held businesses, sponsors, and growth companies—and where to focus next.

  1. Interest expense limits (163(j)): back to EBITDA, with a new twist
    • For tax years beginning after December 31, 2024, the section 163(j) cap reverts to an EBITDA measure (generally allowing more interest than the current EBIT approach). But, effective for tax years beginning after December 31, 2025, OBBBA also brings capitalized business interest under 163(j) (unless it is required to be capitalized under sections 263(g) or 263A(f))—closing a common workaround that capitalized interest could avoid the limitation. Review 2026+ models and debt documents now; consider how the new ordering rule (generally calculating the section 163(j) limitation before application of interest capitalization provisions) affects cash tax and timing.
  2. 100% bonus depreciation: permanent—plus a real-property expansion
    • OBBBA permanently restores 100% expensing for qualifying property acquired and placed in service on or after Jan. 19, 2025. It also creates temporary 100% expensing for certain “qualified production property”—specified U.S. nonresidential real property used in defined production activities—if construction begins after Jan. 19, 2025 and before Jan. 1, 2029, and the property is placed in service before Jan. 1, 2031. Capital-intensive manufacturers (including ag processing, chemicals, autos, and semiconductors) should map capex projects to these windows. 
  3. R&E (section 174): current expensing is back (domestic), with limited retro relief
    • For tax years beginning after Dec. 31, 2024, domestic R&E may again be expensed currently (or capitalized by election). Foreign R&E remains 15-year amortization. Under one special transition rule, certain small businesses can retroactively expense domestic R&E for tax years beginning after Dec. 31, 2021—a refund opportunity worth exploring but which requires amending tax returns or a change in accounting method. For all taxpayers that paid or incurred domestic R&E expenses after Dec. 31, 2021 and before Jan. 1, 2025, a second special transition rule effective for tax years after Dec. 31, 2024 permits an election to deduct the remaining unamortized balance of domestic R&E expenses over a period of  one or two tax year(s),
  4. QSBS (section 1202): faster tiers, bigger caps, broader access
    • For stock acquired after July 4, 2025, OBBBA replaces the five-year wait with a 3/4/5-year framework: 50% exclusion at 3 years, 75% at 4, 100% at 5. It also raises the issuer’s gross-assets cap to $75M (from $50M) and lifts the gain cap to the greater of $15M or 10× basis (except for taxpayers that fully utilized the exclusion amount in a prior year), indexed for inflation from 2027. Growth-stage companies and early-stage investors should tighten cap-table/QSBS tracking now, especially across follow-on rounds.
  5. 199A: pass-through deduction expanded and made permanent
    • Owners of qualifying pass-throughs get long-term certainty: the 20% 199A deduction is extended and made permanent (not increased to 23% as earlier drafts floated). The OBBBA also increased the taxable income limitation phase-in amounts to $100,000 to $150,000 for joint returns ($50,000 to $75,000 for separate filers). Finally, the OBBBA changes include a $400 minimum deduction amount for active QBI of at least $1,000 (amounts to be increased for inflation in following years). Re-test blocker structures and owner-level models.
  6. International tweaks: steadier rules, fewer cliffs
    • GILTI / NCTI:
      • Effective for tax years beginning after Dec. 31. 2025:
        1. The GILTI regime is reshaped by removing the qualified business asset investment (QBAI) reduction to GILTI, and renaming the inclusion as a taxpayer’s net CFC tested income (NCTI). 
        2. The statutory deduction under section 250 for a taxpayer’ total NCTI and associated section 78 gross-up amount is reduced to 40% (versus prior 50%) for tax years beginning after Dec. 31, 2025. 
        3. The OBBBA further trims the deemed paid foreign income tax haircut to 10% (instead of the prior 20%) with respect to NCTI. 
        4. Deductions allocated and apportioned to a taxpayer’s NCTI inclusion for foreign tax credit limitation purposes are confined to: (a) the section 250 deduction associated with the NCTI inclusion; and (b) any additional deductions directly allocable to the NCTI inclusion. Specifically, no interest expense or R&E expense amounts are allocated or apportioned to NCTI for foreign tax credit  limitation purposes.
      • Finally, the OBBA adds a new 10% disallowance for taxes paid or deemed paid on any previously taxed earnings and profits (PTEP) distributions of NCTI after June 28, 2025. 
    • FDII / FDDEI:
      1. Effective for tax years beginning after December 31, 2025:
        1. The OBBA also strikes the QBAI adjustment from the FDII framework.
        2. The OBBA permits deduction of 33.34% of the corporation’s total foreign-derived deduction eligible income (FDDEI) – dispensing with the prior FDII measure.
        3. Interest expense and R&E expense are no longer allocated or apportioned for purposes of calculating DEI and FDDEI.
      2. Effective for transactions after June 16, 2025, certain categories of income are not treated as deduction eligible income (DEI) or FDDEI – for instance gain from sale or disposition (or deemed) of intangible property (see section 367(d)(4)) or any other property subject to seller depreciation, amortization or depletion.
    • BEAT: Effective for tax years beginning after Dec. 31, 2025, the BEAT rate is increased to 10.5% for most taxpayers (11.5% for specific banks and securities dealers). 

      Cross-border groups should re-test ETRs and foreign tax credit positions under the revised definitions and mechanics.
  7. What didn’t make the cut
    • Some headline items that weren’t included in the final law: (i) the headline U.S. corporate income tax rate of 21% is retained and made permanent (versus previously considered reductions); (ii) carried interest stays the same (the Tax Cuts and Jobs Act (TCJA) three-year holding period rule for long-term capital gains tax treatment still applies), and (iii) the proposed “revenge tax” (section 899) on residents of “unfair foreign tax” jurisdictions was dropped.

Quick action list (Q3–Q4 2025)

  • Debt & LBO models: Re-run section 163(j) under EBITDA for 2026+; factor in the elective capitalized-interest inclusion and the new ordering rule. 
  • Capex timing: Align construction and placed-in-service dates to capture qualified production property expensing; adjust procurement/contractor timelines now.
  • R&E cleanup: Separate domestic vs. foreign R&E; evaluate retro expensing/refund opportunities for small businesses and accelerated relief for others.
  • QSBS hygiene: Confirm issuer status, asset levels, and issuance dates; build tracking for the new 3/4/5-year tiers and higher gain caps.
  • Re-evaluate global structures with fresh ETR calculations based on the latest GILTI / NCTI, FDII / FDDEI, and FTC limitation changes. 

Bottom line: OBBBA offers meaningful cash-tax savings opportunities (bonus depreciation / section 168(k), R&E expense deduction / section 174, QBI deduction / section 199A, QSBS exclusion / section 1202) while limiting others (prior section 163(j) capitalization workaround). Savvy business taxpayers will time projects and transactions to the statute’s effective dates, conduct appropriate diligence, and prepare documentation accordingly.

This post provides general information and does not constitute legal or tax advice.

Questions or want a tailored OBBBA impact review?

Contact Nick Eusanio, Partner, Tax Planning & Compliance — DBL Law