If you're thinking about merging with another contractor, the first thing to understand is that the IRS doesn't care what you call it. Whether you call it a merger, a buyout, or a partnership, the tax bill depends on whether you're buying assets or buying equity. Everything else is just noise. This guide sits inside our broader contractor tax planning series. If you're just starting to think about growth, start there.

In an asset deal, you buy the trucks, the tools, the customer list, and the goodwill directly. You get a new tax basis in those assets equal to what you paid. In a stock or LLC membership deal, you buy the entity itself. That means you inherit its old basis, its depreciation schedules, and its tax history, good or bad.

Should you structure the deal as an asset purchase or a stock purchase?

If you're the buyer, you want an asset purchase. If you're the seller, you want a stock sale. The tax code rewards the buyer for taking the asset route.

An asset purchase gives you a step-up in basis. That means you can write off the equipment faster. You also leave most liabilities behind. A stock purchase keeps the entity alive, which can save licenses and bonded contracts, but you step into the seller's shoes on everything else.

Sellers fight asset deals because they pay ordinary income rates on equipment recapture and capital gains on goodwill. Buyers fight stock deals because they can't step up the basis of that old dump truck. Negotiate the price with this gap in mind.

What entity should the combined business use?

There is no single right answer. If you were both sole proprietors, forming a multi-member LLC is usually the cleanest starting point. You get liability separation and partnership-style taxation without the corporate paperwork. If you both had S-Corps, the mechanics get more complicated. You might merge via a qualifying F-reorganization or simply have one S-Corp buy the other's assets. We cover the ongoing tax rules in our multi-member LLC taxes guide. If you're deciding whether the combined business should stay an LLC or elect S-Corp status, see our breakdown of LLC vs S-Corp for contractors.

If you form a new C-corporation to hold everything, you get §1244 ordinary loss treatment on the stock you issue. That caps your potential ordinary loss at $50,000 if you're single, or $100,000 if you're married filing jointly. But that §1244 benefit only applies to the first $1,000,000 of capital raised. For most trade contractors, a C-corp adds unnecessary double taxation. I rarely recommend it.

How does the equipment get taxed after the deal?

In an asset purchase, the equipment basis steps up to fair market value. For 2026, bonus depreciation is back to 100% for qualifying property placed in service after January 19, 2025. That means a truck or excavator you buy as part of the deal can often be written off immediately. Section 179 lets you expense up to $2,560,000 of equipment purchases in 2026. That benefit phases out dollar-for-dollar once you place more than $4,090,000 of equipment in service during the year. We detail the mechanics in our contractor equipment depreciation guide.

Goodwill and non-compete agreements get amortized over 15 years under IRC §197. Customer lists get the same 15-year treatment. You cannot deduct the entire purchase price in year one. You allocate the price to specific assets, and each asset follows its own schedule.

Do you inherit their tax problems?

In a stock deal, absolutely. In an asset deal, mostly not. But some states will chase you for unpaid sales tax or payroll taxes under successor liability rules. California, in particular, is aggressive on this. If you keep the same crew, their worker classification is your problem now. You don't get a fresh start to flip W-2 employees to 1099 status just because the owner changed. The IRS looks at the job duties, not the sign on the door. Our 1099 vs W-2 for contractors guide explains the test.

Run a lien search before closing. Look at the last three years of payroll tax returns and sales tax filings. If the seller owes the IRS, a stock deal means the entity still owes it after you take over.

How much should you set aside for taxes after the merger?

The combined business will almost certainly throw off more net income than either of you had alone. Our standing advice to trade contractors: sweep 25 to 30 cents of every net dollar into a separate tax account the day you take the draw. Use 25% if you're in a no-income-tax state. Use 30% in California. If the merged operation is unusually profitable, push it to 35%. We break down the math in our guide on how much to set aside for taxes.

Post-merger cash flow feels bigger because revenue jumps. But net is what matters for tax set-aside. Don't look at the top-line gross. Look at profit after materials, subs, rent, and payroll.

When does an S-Corp make sense for the combined operation?

Our threshold: when net profit clears $80,000 to $100,000 and looks repeatable, it's time to run the S-Corp math. A merged business often crosses that line immediately. In our experience representing contractors in audits, a salary of roughly one-third of net profit is the level that consistently holds up. The rest comes out as distributions. If both of you were already S-Corp owners, you can't just combine payroll without respecting the one-class-of-stock rule and the qualified subchapter S subsidiary rules. See when to become an S-Corp for the full income trigger analysis, and how to pay yourself for the wage-vs-distribution split.

If you stay in an LLC partnership, you pay self-employment tax on the active share of profits. If you elect S-Corp status, only the W-2 wages face FICA. The Social Security wage base for 2026 is $184,500. Above that, the Medicare tax continues but the 6.2% Social Security piece stops. That wage base cap is one reason the S-Corp savings grow as profit scales.

What about sales tax and contractor's licenses?

An asset purchase usually means you need your own contractor's license in the state or city. The seller's license dies with the old entity. A stock purchase might keep the license alive because the entity survives, but many state boards still want notice of the ownership change. Sales tax permits do not transfer automatically. If the seller had a resale certificate for materials, you need to apply for your own. We cover multi-jurisdiction issues in our sales tax multiple cities guide.

How is the sale reported to the IRS?

The seller reports an asset sale on Form 4797. Ordinary income rates apply to depreciation recapture on equipment. Capital gains rates apply to goodwill. In 2026, the 0% long-term capital gains rate for married filing joint taxpayers tops out at $98,900 of taxable income. The 15% rate runs up to $613,700. Above that, the 20% rate kicks in. For single filers, the 0% bracket ends at $49,450, and the 15% bracket ends at $545,500.

A stock sale is simpler on the seller's side. It is usually long-term capital gain if they held the stock more than a year. The buyer gets no step-up inside the corporation. The assets keep their old basis. That is why buyers hate stock deals.

What should you do before closing?

• Get a qualified appraisal of the equipment and allocate the purchase price in writing.
• Review the last three years of the seller's tax returns, payroll filings, and sales tax returns.
• Decide whether the crew stays W-2 or is properly 1099 under your control. Don't assume the old classification was correct.
• Open a new tax account and set your first estimated tax payment based on the combined net profit.
• If you are the seller, talk to a tax strategist about installment sale treatment to spread the gain across multiple years.

Common questions about merging contractor businesses

Trying to figure out if merging with another contractor makes tax sense? We help trade contractors structure buyouts, asset sales, and entity mergers so you don't overpay on the transition. Book a meeting with our team here.