Mergers and acquisitions (M&A) are transactions where two companies combine or one company acquires another, typically to strengthen their market position, increase profitability, or gain access to new products or technologies. While M&A can be beneficial for both parties involved, it also has significant tax implications that should not be overlooked. Here are the top 10 tax considerations for M&A deals.
1. Structuring the deal
The way a deal is structured can have a significant impact on its tax consequences. For example, an acquisition of assets may result in higher taxes than an acquisition of stock because the buyer would assume the seller’s liabilities if they acquire assets.
2. Purchase price allocation
When one company acquires another, the purchase price must be allocated among various assets such as inventory, property and equipment, intangible assets like patents and goodwill. The Internal Revenue Service (IRS) has specific rules about how these allocations are made that could affect depreciation deductions and gains on future sales of those acquired assets.
3. Section 338(h)(10) election
Section 338(h)(10) election allows a buyer to treat an acquisition of stock as if it were an asset purchase for tax purposes while still maintaining continuity with the target corporation’s existing entity status for legal purposes.
4. Tax attributes carryover
In some cases, when a target corporation is acquired in a stock sale rather than asset sale transaction certain pre-acquisition net operating losses or other tax attributes may carry over from the previous owner to offset future income taxes owed by new owners post-transaction.
5. Transaction costs
Transaction costs incurred during an M&A deal may be deductible under certain circumstances but could also need to be capitalized depending on how they relate to each specific transaction.
6. Employee benefits and compensation plans
Employee benefits and compensation plans associated with either party in connection with an M&A transaction will have unique issues requiring analysis including items such as vesting schedules, change of control provisions and potential golden parachute payments.
7. State and local taxes
State and local tax considerations can be just as important as federal tax implications in M&A transactions. The rules vary by state and may affect the way a deal is structured or how income is allocated between entities post-transaction.
8. International tax considerations
M&A deals that cross international borders have additional complexity due to the varying global tax laws governing each country involved. Tax treaties between countries can help mitigate some of these complexities.
9. Deferred taxes
Deferred taxes are typically created when there are differences between book accounting methods used for financial statements versus actual cash basis accounting used for taxation purposes. They may also arise from items such as net operating loss carryforwards, depreciation deductions, or other timing differences in recognition of revenue or expenses on books versus tax returns which must be considered during an M&A transaction.
10. Post-transaction planning
Once a deal has been completed, there may still be opportunities to minimize future taxes through post-transaction planning strategies like restructuring subsidiaries, reviewing transfer pricing policies, optimizing inventory management practices among others.
In conclusion, understanding all the potential tax consequences associated with M&A deals is critical to maximizing value creation while minimizing unexpected costs down the road. Experienced advisers can help ensure that both parties involved understand these complex issues from day one so they can make informed decisions about their M&A strategy going forward.