The tax burden on the acquisition or sale of a business is one of the most overlooked aspects of transactions. Many business owners fall trap into unnecessary things that could have been easily solved if they only considered creating a well thought out tax strategy. In this episode, we shine the spotlight on this often missed subject with the President of The Center for Financial, Legal & Tax PlanningRoman Basi. As someone who lives and breathes in the tax code to help business owners maximize their tax situations, Roman guides us into a deeper understanding of tax codes and how he and his team assist their clients throughout the process. He unpacks some of the recent tax changes, including those that fly below the radar for a lot or business owners, and the impact they have on businesses. Read through this eye-opening conversation with Roman that will have you negotiate and choose your business deals better.

Listen to the podcast here:

Subscribe Now:

Subscribe to K2 Adviser on YouTube
K2 Adviser on Apple iTunes
K2 Adviser on Google Play
K2 Adviser on Stitcher App
K2 Adviser on Spotify

Understanding Business Tax Codes With Roman Basi

We all know how daunting the Tax Code is for businesses and how quickly the landscape can change. That’s why I am thankful there are people like my guest. Roman Basi is the President of The Center for Financial, Legal & Tax Planning. He lives and breathes in the Tax Code to help business owners maximize their tax situations. I’m excited to unpack some of the recent tax changes with Roman and the impact it’s had on businesses.

From my perspective, the tax burden on the acquisition or sale of a business is one of the most overlooked aspects of transactions. Often, the owners that we work with get hyper-focused on the top-line value of a business. They’re not realizing that a well-thought out tax strategy can significantly alter the need for a specific top-line number if your net proceeds from the transaction meet your objectives. Roman, welcome to the show. I’m certain you see a lot of what I’m referring to in regards to top-line valuation versus net proceeds.

Thank you for having me. We do see a significant difference in the valuation of companies and their net after-tax cashflow of the transactions.

I always wonder why people overlook this? We’ve worked with your group on a number of occasions and with your dad in particular. Every time we’ve engaged you, you’ve come in and we’ve been able to move the needle in a significant way for our clients from a tax perspective to the point where they’re like, “I don’t need to get that valuation number that I thought because look at what I’m going to walk away with.” It’s such an eye-opener for people and we try to get people to do this early in the process or even before the process starts but it’s something that people can’t wrap their heads around for some reason.

It is vital to the transaction. We work on these on a daily, if not hourly, basis. We’ve got a couple of people here in our office that focus solely on these tax and cashflow analyses. I have a little rundown chart I wanted to explain. What we’re doing is we’re looking at the valuation. We’re looking at the proposed sale price of the business, the proposed marketing price of the business. We look at what are your expenses of the sale going to be? Those are going to first change the tax structure. We look at what’s the current balance sheet of the company and what can we allocate to in the transaction.

If you’re a seller reading this, if you’re a broker reading this, allocation is crucial for what we do. How can we minimize the taxes on the transaction based upon the allocation structure? From there we look at, “How much goodwill can we inject into this company?” Does it have goodwill? Does it have company goodwill or enterprise goodwill? Does it have personal goodwill to the owners? We’re dealing with this every single day. What about liabilities? What liabilities are being required to be paid off? If you’re reading, the payoff of a liability at closing is not a deduction for tax purposes. You still have to allocate to that amount and pay tax on that amount. We’re looking at that to structure it as well.

We’re also looking at liabilities that are assumed. We’re going to say, “What liabilities are the buyer assuming in the transaction?” We then can take a look and say, “What are our taxes going to be on the sale? What is our net cashflow going to be to our owner after the taxes?” We’re also breaking out, “Is there a seller note that’s involved? If there’s a seller note that’s involved, typically, that will lower the taxes because it’s spreading out the income over the next couple of years for the seller.

We look at earn-outs. Is there an earn-out? Believe it or not, there’s supposed to be an interest component to an earn-out. A lot of people in the industry don’t understand that, but when a seller has an earn-out, part of the earn-out is income and part of the earn-out his interest. Also, we don’t like to call them earn-outs if we don’t have to. We look at them as what we call a purchase price adjustment. It impacts the taxes, trying to lower it.

In that same analysis, we’re also looking at what are your local taxes? Are there sales taxes on the sale of the inventory, on the sale of the equipment? Even though it’s a onetime sale of a business, some states, I’ll use an example., we’re working on a deal in the state of Kentucky. The sale of equipment, even if it’s a one-time sale, is taxable. A sales tax has to be applied. We look at that. Sometimes promissory notes are taxed. The State of Florida taxes a note. If the seller takes a note, it’s taxable.

We look at rent, security deposits and then finally, we want to look at the personal tax rate of the seller so that we know what are the taxes that the seller is paying personally. When we distribute the funds out of the sale of the company, if we’re winding the company down after the sale, what is the seller going to receive as a distribution? Maybe it’s a C corporation and not a pass-through. We’re looking at that tax impact. Maybe it is a pass-through. How much is it going to be taxed personally to the seller? Those are the things that we look at in the tax analysis.

What you’re pointing out here is all the complexity. Look at all the things that you hit on. There’s so much complexity to this, which is making the point that we were talking about. You can’t and you shouldn’t overlook the tax analysis of a deal. My opinion is you should do it before you’re even in a deal, understand what the best outcome is so that your advisors in the deal can be negotiating towards that. Why wait until after you have an offer on hand? Do it upfront.

It’s the ideal component. If you do it up front, then you’ve got a better idea of how to negotiate to get the bottom dollar that you want to get out of the transaction.

I wanted to talk to you about the Tax Code and some of the changes that fly below the radar screen for a lot of business owners and they don’t realize it. The impacts that those have on their business and potentially their walk away or even structuring their walk away. Highlight for us a couple of the top line changes that have occurred, then we’ll dive in deep on a few of those.

Even before I go into the top line changes, I do want to make a comment that it was announced that President Trump is looking at the extension of the tax expirations that expire in 2026. We’re expecting tax cuts 2.0 in the near future. The majority of that will be an extension of these. The first one of which when we look at these high-level tax elements that have come into play is the Opportunity Zone Funds. These are the newest thing that were in the last Tax Cuts and Jobs Act. The overall theme is this, for a seller of a business, there’s potential to offset all of the gains that are made from that investment sale if the investment is held over 5, 7 or 10 years.

In a nutshell, if a seller has capital gains from the sale of anything and in this world we live in from the sale of a business, they can invest those gains in an Opportunity Zone Fund. These are funds that are set up across the country. You can go to a broker and invest in a fund or you can set up your own Opportunity Zone Fund. Certain things have to be done. If the gains are put into the Opportunity Zone Fund, it can be held there. The taxes on those gains are deferred.

MAU 40 | Business Tax Codes

Business Tax Codes: If you do tax analysis up front, then you get a better idea of how to negotiate a deal to get the bottom dollar that you want to get out of the transaction.


That’s unbelievable. Before we dive into the specifics, let’s take a step back. It’s fairly obvious, but I’m sure there are some nuances to this. Can you describe what an Opportunity Zone Fund is exactly?

The IRS created zones across the United States of underinvested, low-income, economically depressed areas. In the beginning, there were only about 31 of these zones that they created of these low-income areas that needed investment in the United States. That’s what the opportunity zones were. They then expanded that. Now the listing has almost every single zip code in it. You can find an opportunity zone in your community. It expands a little bit and says, “Now you have to either invest in a fund in one of these communities or you can start your own fund.” The idea behind it is that it’s going to spur economic development. You don’t have to live there. You don’t have to work there. You don’t have to have a business there. The zone and the fund are separate from you, the investor.

What are the rules and regulations around these funds? Is there a minimum amount of investment, the money that has to be put into the fund that you have to distribute X percentage on an annual basis? What are some of those key tenants of these funds?

There are some keys. The essential element is that if you put your capital gains into the fund, and if you leave it in there for five years or less, your benefit would be that you’ve deferred the capital gains that you put in there. If you’ve sold your company, you put all of your capital gains into the zone fund, you do not pay any tax right now on those funds. You can sell your company and pay zero tax when you roll these into one of these funds. If you pull them out before five years, it’s fine. You just pay the tax at that time. It’s similar to a 1031 Exchange and ending it.

Are you paying the tax rate at that point in time or is it the tax rate from when you sold the business? What tax rate is being used when you pull those funds out?

When the gains are deferred, they’re not recognized until you pull them out of the fund. It’s like a 1031 Exchange. You’re not recognizing the gain. You’re deferring the gain until a later time. Depending upon the law at that time, depending upon the extender law that we may get in 2020, that answer may be different but now, it’s a deferral. You put the gains in there and after five years, if you pulled them out, you would then report the gain and pay the tax on the gain. If you hold them for five years, you then get a 10% step-up in basis on the existing gain that’s in the fund.

Let’s make it simple. If you put $100 into one of these capital gains, after five years you’re only taxed on $90. That’s the benefit to hold it for five years. If you hold it for seven years, we’ve already lost part of the new law, because as of December 31st, 2026, the law expires. On December 31st of 2026, unless we get an extension, which I anticipate we will. You owe the tax on the original game, which at that point would be $90. You’ve held it for more than five, but less than seven, because the law expires. If the law gets extended, if you hold it for seven years, you get a step-up in basis of 15%. You get $15, now you’re only paying tax on $85. We have to have an extender for that to happen.

However, there’s one final piece to the puzzle. If the investment is held for ten years, you’re still deferring your tax other than the 12/31/2026 date. You pay your tax on $85 on 12/31/2026. Now, you have $85 of original gain in there, deferred. That money in ten years should be worth significantly more. Let’s say it’s worth $200 after ten years. If you hold it, I don’t care how much longer you hold it, you will pay no tax ever. It is not a deferral. You are only deferring $85 of gain. The rest of the gain is exempt from tax. There’s a big difference in terminology. Imagine when you’re rolling $1 million investment. In ten years, it’s worth $2 million or it’s worth $1.5 million. Look at the rules of eight. Does it double in eight years? That gain is exempt from tax and that part of the law does not expire.

Are their minimum thresholds? Do you have to invest X amount of dollars? I’m assuming you have to put the money to work in some way if you’re setting up this fund. You can’t just open up a fund and have the money sit there. What are the rules and regulations around how the money gets deployed in those opportunity zones?

There are specific rules on how much of the investment has to be utilized for economic development. There are also specific rules in terms of the valuation of the zone. I believe it’s within 36 months if I’m not mistaken. You have to pay specific attention to Code Section 1400Z-2 to look at what your investment has to do, but that’s why they’re called Opportunity Zone Funds. You can’t just invest the money into a zone and not do anything with it. The zone fund has to be working.

The one thing that has to be done and I wanted to make mention of this Because people don’t know this. We’re getting a lot of questions at the end of 2019 because you had to make the investment by 12/31/19 in order to make it seven years. “Roman, I sold my business in August. Am I limited? When do I have to invest the money?” You have six months from the date of the sale to make the investment. That’s the first numerical timing you want to watch out for. When you’ve sold your company, you have six months to invest the capital gains.

Make sure you know what you’re doing when you talk to your brokers like Domenic and your advisors. You are as a seller in an Opportunity Zone Fund, you’re allowed to hold on to your gains until you make the decision. We had people call us and said, “Roman, I sold my company in August, but I took the money into my company bank account. Do I still qualify to now invest the money into an Opportunity Zone Fund?” The answer is yes.

In fact, there may have been a regulational adjustment for some people that sold their businesses in 2019. I’d have to look into this because I do remember reading something about relaxing the six-month rule. All of 2019, we were dealing with proposed regs, and then eventually final regulations on this tax topic. The IRS relaxed some of the requirements throughout the year. I don’t think they’re relaxed any longer. If anyone has sold their company and they are still thinking about how to deal with these gains, it’s something that needs to be looked at.

You can put the money into this fund. I’m assuming you can start a new business, buy a business in that zone. Invest in somebody else’s business. I’m assuming you have any number of things that you can do with those funds, correct?

Yes, we even had a company in Texas that sold. At the time, they were contemplating investing in a new company. As long as it was inside of the opportunity zone. We were creating an opportunity zone in an economically depressed area as certified by the IRS, and they were taking their capital gains and investing it to start up a new business. They were rolling over their proceeds for lack of a better term.

When you've sold your company, you have six months to invest the capital gains. Before you get involved in a deal, ask. Click To Tweet

It’s akin to a 1031, but it’s for businesses and not for real estate?

It can be for quite a few different things. It’s 1031 for businesses. It’s 1031 for equipment. It’s 1031 for other types of investments. It’s all-encompassing, there are not as many limitations as we first believed.

I’m assuming you can set up any entity that you want to hold the money in this fund. You can have an LLC. Is there any entity that works or are there some requirements as far as the entity goes?

To the best of my knowledge, I believe it’s any entity, so long as it’s in the zone, properly set up as a zone fund, then the fund can operate as any type of corporate structure that it needs to be. Typically, we are seeing them set up as real estate investments, then we see the business investment come in on the back end with other investors coming into these.

Let’s say you sell your business. You roll over the proceeds into this opportunity fund. I’m assuming you don’t have to roll over all your proceeds. You could take 50% of your proceeds and pay tax on the other 50% and roll 50%? You roll whatever proceeds you want in this opportunity fund. You buy a business. You grow that business dramatically and you sell it for three times what you bought it for. If you hold it for more than ten years, I’m assuming not only are you foregoing tax on the original investment, you’re also foregoing tax on the gain from the sale of that business if you held it for more than ten years. Is that a fair statement?

This is where originally there was a lot of confusion when they first passed the law. They were promoting them and there were a lot of individuals out there promoting, “You pay no tax at all.” No. You pay tax on the original gain that’s investment. It is only deferred. It’s the gain that gets the step up. If they give us an extender 15%, that tax is due on 12/31/2026. All of the investment gains is exempt. You have a deferral of tax. You’re passing it off like a 1031. We anticipate this extender, if we get the extender, you should be able to defer the tax beyond 12/31/2026 like a 1031, until we sell the original invested amount.

If you’re a serial entrepreneur, this is seriously something you need to be thinking about.

We are writing a continuing education program. If there are CPAs or attorneys reading, we are writing a continuing education program that will be much more in-depth to answer a lot of the questions you’ve asked. You’ll see those questions not just answered but detailed. Maybe you would like to do a follow up once I have all that information?

I’d love to. That would be great. Going back to how we opened here. There have been many changes to the Tax Code. We’ve covered opportunity zones well unless you think there’s something else to mention there. If not, are there other changes in the Tax Code that are worth mentioning?

One of the biggest changes was the limitation of a 1031 Exchange. Domenic, I’ll be honest, I’m in the middle of five of them. We in the M&A industry think the business owners are adept at 1031 Exchanges. I will tell you that is a huge fallacy. I find that business owners do not understand what the 1031 Exchanges are. The Tax Code changed, it hurt us. In the past, you could exchange equipment, you could exchange other pieces of business property. You could sell something and go buy something and defer the tax on pretty much anything that was a like kind property or similar property, equipment for equipment.

For example, I’m selling a crane company. The cranes could have been 1031 within the transaction. It can’t do that anymore. The new code limited the 1031 to real estate only. If you have a transaction that has real estate in it, one of the things you have to ask yourself is, “1031 still exist and do I want to 1031 the real estate portion of the transaction?” Owners have got to understand that when you sell your company, if that’s part of it, you can defer the tax if you’re going to take some of the money and buy another piece of property of real estate. We can defer the tax indefinitely if you’re going to do that.

What do we try to do? This whole topic is about tax and I get involved to minimize tax on a transaction. What do I do if I have a real estate involved in a transaction, and I have equipment and assets also in the transaction, but I know the owner is going to 1031 the real estate? I try to allocate as much as I can to the real estate because I’m going to defer as much of the tax as I possibly can. They don’t understand that. When I do the tax analysis and we show what we call waterfall to them, we say, “Look what you can do with your real estate, because you told me you’re going to take $600,000 of what comes in, and you’re going to use $315,000 for a piece of real estate.” They don’t realize it’s still there. The Tax Code took away part of it, not all of it.

That is a big change. I wonder how many people understand that?

They don’t. We have a smaller transaction that came in, $1 or $2 million. A broker in the Midwest called us. My first phone call with the owner and the broker. I simply asked the question, “What do you plan on doing after the sale is over?” The owner looked at me and he goes, “There’s a facility that I want to purchase.” He goes, “This is in the Missouri-Illinois area and the legalization of cannabis has happened.” He goes, “We need growing areas. I want to purchase this warehouse and I’m going to lease it to this group as a growing area for cannabis sale.” We said, “If you’re going to do that, we’ll 1031 part of your sale.” They had no idea that he was eligible for that. A simple fix and we shed $300,000 of gain and we’re deferring that tax.

$300,000 of gain which they could have paid $100,000 in tax, probably a little less. That is tremendous.

MAU 40 | Business Tax Codes

Business Tax Codes: You can’t just invest the money into a zone and not do anything with it. The zone fund has to be working.


I’ll step back and say this too. When I gave you the example of the crane transaction we have going on. There is still a 1031 possibility within the new code section under Section 1045. 1045 is the tax-free exchange of stock of a business. I have a company come to me. It’s a fairly large transaction, X amount of dollars. They say to me, “We need to transfer our equipment in an asset sale. We’re going to get hit with taxes. We’re going to get hit with sales tax on the transfer of the equipment. What do we do?”

One of our proposed solutions is to drop this equipment into a brand-new corporation, which is a tax-free drop under Section 351, then sell the stock of that. It’s a brand-new corporation, then turn around and sell the stock of that corporation under 1045 to the buyer. You will be able to exchange that stock tax-free sale and we are able to transfer the equipment. What we’re doing there is we’re getting around this state sales tax that’s being imposed because the sale of stock is not taxed, but the sale of equipment is. We have a six-figure savings by doing what we call a drop down into a 351 and then doing a 1045. There are still ways to structure these things under these new Tax Codes.

If that’s not enough right there for people to realize that they need to call you, I don’t know what is, 351, 1031.

I don’t mean to throw out numbers.

It is code and you are an expert at it. You, your dad and your entire firm are amazing.

We live it and breathe it. We love it.

You do and I know it. I’ve seen what you’ve done for our clients. Roman, it’s been such a pleasure to have you here. Any last parting words that you’d like to share with the M&A Unplugged community? Then let’s make sure we get everybody your contact information.

Don’t be afraid to ask. Don’t be afraid to call. Find out what your after-deal flow looks like. As Domenic said, before you get involved in a deal, maybe as soon as you talk to a broker or an M&A advisor like Domenic, ask. The owners that are reading, the community, don’t be afraid to ask.

Roman, how can people get in touch with you if they have some questions?

Our website is My email is [email protected]. Our phone number is (618) 997-3436. We offer this to the whole community. We review deals at no charge. We review your tax situations at no charge. We then have a phone call with all of you at no charge, advisors, brokers, owners. We follow that phone call up immediately with an email a quote for our services and what we can do. We have had a great 2020. We are only looking forward to good things. That’s how you can contact us and that’s how we operate.

Roman, thank you so much. I appreciate you being here.

Thank you for having me.

M&A Unplugged community, there’s so much there to discuss. I normally do a recap, but there’s so much detail here. Go back to this episode again or pick up the phone and call Roman or email him, you won’t be sorry you did. He can help you think through your tax situation pre, post-transaction. The sooner you do this, the better because there might be some things that you need to do and change in the structure of your business and the way you’re running it before you decide to take it out to market. That will give you the window of opportunity to make those changes. When you decide, the day arrives that you want to sell, you don’t have to scramble and make a whole bunch of changes and delay that moment. You’re ready to go to market.

If you would like to learn more about the process of acquiring or selling a business, please visit our website at or feel free to reach out to me at [email protected]. I look forward to seeing you again on the next episode. Until then, please remember that scaling, acquiring or selling a business takes time, preparation and the proper knowledge.

Important Links:

About Roman Basi

Roman Basi is an Attorney, CPA, Real Estate Broker and Title Insurance Agency. He is the President of his firm, The Center for Financial, Legal & Tax Planning, Inc. His law and Accounting firm specializes in Mergers and Acquisitions of Privately Held Companies across the United States. His areas of expertise are Tax Planning, Business Succession and Business Valuation. Roman also speaks across the country on a regular basis to Trade Associations.


Love the show? Subscribe, rate, review, and share!

Join the M&A Unplugged Community today: