United States

6 keys to effective tax planning when growing by merger or acquisition

Plan early to manage M&A tax considerations related to your transaction


An acquisition is often the best way to penetrate a new market, increase share in an existing one, or branch out into new product or service areas. If an acquisition is central to your growth strategy, then effective, timely tax planning will play a significant role in the success of your deal. The following six steps will help you boost post-transaction cash flow, maximize tax planning opportunities, and identify and mitigate potential tax liabilities and controversies.

1.     Start transaction tax planning early

Often, companies conduct no, or only cursory, tax due diligence prior issuing a letter of intent. By considering some key tax issues prior to the letter of intent, you can retain some leverage and may be able to realize more beneficial tax results. For example, if you are acquiring an S corporation and wish to treat the purpose as an asset sale, the target will have to make a Section 338 election. Since the tax benefits of this move will accrue to the purchaser, if you wait until after the letter of intent to make this request, the seller may well negotiate for additional consideration. By anticipating this, or other, tax issues in advance and including them in the terms of the offer letter, you can improve your position.

2.     Look for credits and incentives that benefit your deal

Federal, state and local taxing jurisdictions offer a wide array of tax credit and incentive opportunities. These can be based on a huge range of activities, from creating or retaining jobs to capital investment. Companies making an acquisition often can capitalize on these options. Don’t just look at existing statutory programs—companies are often able to negotiate customized incentives when they are making a sizable investment in a jurisdiction. Check on credits and incentives before you make an offer. These programs are generally designed to attract investment, not to reward companies for deals that are already in place. So investigate your credit and incentive opportunities early.

3.     Consider your transaction structuring options

In general, an asset purchase provides better tax results for the purchaser. You will be able to accelerate amortization of the acquired assets, which generates significant near-term cash flow benefits. You should also think about where to place acquired liabilities within your new combined entity in order to maximize federal, state and even international tax benefits.

4.     Check on viability of target company tax attributes

Net operating losses or other tax attributes of the target company provide key tax benefits, but only if they survive the transaction. For example, Section 382 imposes significant limitations on the utilization of net operating losses after certain changes in corporate ownership. Be sure you understand whether and to what extent the target company’s tax attributes will survive your deal in order to fully calculate your after-tax benefits.

5.     Don’t forget target company tax liabilities

Your tax due diligence should explore the target company’s current and projected tax liabilities and how they will be addressed in your deal. Most deals include some level of indemnification for undisclosed tax issues. Don’t forget to look at state and local and payroll tax issues. Those liabilities are sometimes overlooked in the planning process, but can be significant. In addition to existing liabilities, consider how the new footprint of your organization will affect your state and local tax posture going forward, not just for income taxes, but for sales and use taxes as well.

6.     Identify special needs of international deals

Cross-border acquisitions bring special tax challenges, especially if they move you into new tax jurisdictions for the first time. All of the planning issues discussed above now need to be viewed through yet another filter. Corporate structuring issues become increasingly important. If you plan on making additional international deals, this may be the time to consider a holding company structure. This is also the time to think through transfer pricing and other operational tax concerns to understand your tax posture going forward.