Navigating the Tax Implications of Mergers and Acquisitions

Mergers and acquisitions (M&A) have key legal, human resources, intellectual property and tax implications, all of which can impact the success of a deal. Among the most complex are merger tax considerations, which can influence deal structures, financial performance and long-term value creation. For example, the complexity of tax laws and specific regulatory changes contributed to the withdrawal of AbbVie’s $54 billion deal with Shire in 2014.¹

This blog post explores the tax aspects of M&A. It covers key tax implications, how taxation works in mergers and acquisitions and how you can develop corporate financial strategies to support the successful navigation of M&A tax challenges.

Understanding Tax Implications of M&A

Often, tax issues are among the top concerns in mergers and acquisitions for both the target and acquiring company.² Any inadequacy in tax compliance can lead to expensive consequences.

Typically, M&A tax challenges arise from the following:

• Change in ownership
• Adjustments in valuation
• Requirements for compliance with tax laws across all jurisdictions

As an accounting professional, you can help businesses understand the tax effects of asset and stock transactions, goodwill treatment and potential tax liabilities arising from pre-existing issues in the acquired entity. Whether buying or selling, the company should consider the following items.

Transaction Structuring

One key consideration is whether to structure the deal as a stock purchase or an asset purchase, as each has distinct M&A tax implications.³

In a stock purchase, the buyer acquires the target company’s shares, assuming all assets and liabilities. Selling companies usually favor stock purchases because proceeds from the sales are typically taxed at capital gain rates, which are often lower than ordinary income tax rates.⁴ However, buyers inherit the existing tax basis of the target’s assets, limiting future depreciation or amortization benefits. Buyers also assume all liabilities, including potential unknown obligations.

On the other hand, asset purchase lets the acquiring company select specific assets and liabilities, allowing for the exclusion of unwanted items. This approach enables buyers to step up the tax basis of acquired assets to the purchase price, which can enhance depreciation or amortization deductions.

Understanding the tax effects of merger structures can help you advise an organization to select the most advantageous structure.

Tax Attributes

You also want to consider financial benefits, such as net operating losses (NOLs) and tax credits that a company can carry forward to reduce future tax liabilities. When acquiring a company, buyers may take advantage of such tax attributes to offset taxable income and lower overall tax costs.

For example, if the acquired company has unused NOLs, the buyer might apply them to future profits, reducing tax obligations.⁵ Similarly, carryover tax credits, such as research and development or foreign tax credits, can offer additional savings if they meet legal and regulatory requirements.⁶

Goodwill and Depreciation 

A company should also evaluate how intangible assets impact post-merger tax obligations. Consider goodwill, for example: the portion of the purchase price that’s higher than the sum of the net fair value of the asset bought and liability assumed.⁷ How the IRS treats goodwill depends on how a company structures its deal. In an asset purchase, Section 197 of the IRS code allows goodwill to be amortizable over 15 years for tax purposes.⁸ However, in a stock purchase, goodwill remains in the books but isn’t tax-deductible. Beyond goodwill, the buying company in an asset purchase can step up the tax basis for acquired assets, allowing for accelerated depreciation and immediate tax benefits.

Pre-Merger Tax Due Diligence

Tax due diligence includes establishing a target company’s maximum potential tax exposure, determining whether it owes back taxes and identifying ways to reduce its tax burden in a merger. Conducting due diligence involves three main processes:

• Reviewing tax filings and audits for discrepancies or unresolved issues
• Identifying unclaimed deductions, credits or tax incentives
• Assessing the impact of pending or recent tax law changes on the transaction

Tax due diligence findings often impact the deal structure, indemnification and escrow holdbacks. They also inform acquisition-related tax strategies to improve the deal's overall tax efficiency and reduce unforeseen costs.

Post-Merger Tax Structuring and Compliance

Post M&A, organizations must focus on optimizing their tax structure to ensure compliance and maximize long-term benefits. Companies should consider the following:

Integration Planning

Merging two companies requires integrating acquisition tax strategies to create operational efficiencies. It involves consolidating accounting methods and financial reporting, reviewing tax attribute utilization and evaluating the impact of transfer pricing rules for cross-border transactions.

Entity Restructuring

The company also has to determine the best legal and tax entity structure—C-corp, S-corp or LLC—that aligns with its business goals and tax efficiency. Accounting professionals should assess whether the company should merge, dissolve or retain subsidiaries for optimal tax benefits.

Compliance and Reporting

Noncompliance with tax regulations can lead to penalties, interest charges and reputational risks.9 Companies should therefore ensure the accurate and timely filing of federal and state taxes to meet regulatory requirements in all jurisdictions. The company should also review the impact of tax law changes on post-merger operations and implement a system for ongoing tax reporting and documentation.

Effective post-merger tax planning ensures that the combined organization benefits from synergies while minimizing tax burdens.

Strategies for Reducing M&A Tax Liabilities

Proactive M&A tax planning can significantly reduce tax liabilities. Organizations can take advantage of several approaches to minimize tax liabilities:

• Timing transactions in a specific tax year to optimize tax outcomes
• Structuring earn-outs and deferred payments to spread tax obligations over multiple years
• Utilizing international tax treaties to minimize withholding taxes on cross-border deals

By working with tax professionals and leveraging advanced tax planning software, businesses can unlock significant savings and ensure compliance.

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Tax regulations evolve regularly, and businesses rely on skilled professionals to navigate complex M&A tax strategies. With DePaul University’s online Master of Science in Accountancy program, you’ll gain hands-on experience in tax planning, compliance and financial structuring to drive successful transactions. Our rigorous curriculum will equip you with the advanced knowledge and skills needed to excel in M&A tax planning and other critical accounting areas. To learn more, review our admissions requirements today.