Topic
Tax Implications of Mergers and Acquisitions
Because the pandemic accelerated the adoption of technology, many companies have capital to invest. Mergers and acquisitions (M&A) as a growth strategy can help these companies win the race to own emerging technologies, capture new opportunities, enhance current offerings, and cement market leadership.
But buyer beware: Maximizing value and cash flow amid fast-moving buying and consolidation plans requires a comprehensive federal tax planning strategy as well as tax-focused analyses and modeling of any potential deals.
What are the main tax implications of mergers and acquisitions?
A merger or acquisition may be a tax-free IRC §368 reorganization or a taxable transaction under the principles of IRC §1001. There may also be state tax consequences from some types of M&A transactions.
The potential tax consequences of a merger or acquisition to a business entity and its owners – and the complexity of the tax principles involved – dictate that one of the most critical aspects of structuring such a transaction is corporate tax planning.
The tax department provides a strategic analysis that informs and guides M&A decisions and structuring. This includes reviewing the following through the lens of tax liability and the impact on the cash flow and value of the merged business:
- Structuring
- Due diligence
- Compliance
- Data retention
- Integration of systems and departments
- Legal entities
- Accounting methods
- International employment services
- Cross-licensing arrangements
- Transaction-cost recovery
Federal tax treatment of a merger or acquisition
As defined in I.R.C. §368, a corporate reorganization is a term of art used for federal income tax purposes and encompasses various types of corporate transactions, including:
- Acquisitions of assets or stock of one corporation by another
- Readjustments of capital structure of a single corporation
- The division of a single corporation into two or more entities
A reorganization must meet several statutory and common law requirements for the participating corporations and their shareholders to avail themselves of favorable tax treatment.
How much tax is paid when a company is acquired?
An acquired corporation recognizes no gain or loss upon an exchange pursuant to a plan of reorganization if it receives solely stock, securities, or both in a corporation that is a party to the reorganization – and the acquired corporation distributes such stock, securities, or both to its shareholders.
If an acquired corporation receives other property (boot) in the reorganization, it recognizes gain to the extent of the boot if the boot is not distributed to shareholders of the acquired corporation.
The acquired corporation generally recognizes no gain or loss on the distribution of stock, stock rights, or obligations of another corporation that is a party to the reorganization, if the acquired corporation received the distributed property in the reorganization.
In general, an acquiring corporation recognizes no gain or loss upon the issuance of its stock in exchange for the property of an acquired corporation.
The assumption of the liability of an acquired corporation is generally not treated as the payment of cash and no gain is recognized.
What is the tax basis in an acquisition?
The basis of an acquired corporation’s assets carries over to the acquiring corporation increased by any gain recognized by the acquired corporation’s shareholders.
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Our renowned Tax Management Portfolios provide expertise and perspectives of leading practitioners from around the world. They can help your team understand the principal M&A tax planning considerations for designing an appropriate transactional structure for a corporate acquisition, with deep dives into specific transactional structures.
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Time-saving practice tools such as charts, working papers, and step-by-step guides help your team conduct M&A tax planning quickly and efficiently. For example, our Deemed Asset Acquisition Election Tool (I.R.C. §338/336(e)) helps you understand the requirements and determine whether your company is eligible to make the election.
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