Checklist: Tax Prep for M&A Transactions

Proper tax preparation is critical in mergers and acquisitions (M&A). It can save money, reduce risks, and simplify post-merger integration. Here’s a quick overview of the key steps:

• Before the Deal:
  • Review 3–5 years of tax records for risks and liabilities.
  • Identify tax benefits like Net Operating Losses (NOLs) and R&D Tax Credits.
  • Choose the right deal structure (cash, stock, or hybrid) to optimize taxes.
• During the Deal:
  • Understand seller capital gains taxes in cash deals.
  • Plan buyer tax strategies, including depreciation benefits and financing deductions.
  • Explore tax-free treatment options in stock deals for deferral opportunities.
• After the Deal:
  • Combine financial systems for unified tax filing.
  • Leverage tax benefits like NOLs and ensure compliance with state and federal laws.
  • Maintain thorough documentation for IRS and state requirements.

Key Tip: Partner with experienced tax advisors to maximize savings and ensure compliance.

This checklist simplifies complex M&A tax planning, helping you focus on boosting deal value while avoiding costly mistakes.

Tax Planning Before the Deal

Planning ahead for taxes can help save money and shape the deal structure effectively in M&A transactions. Here's a breakdown of key steps to take before finalizing the deal.

Reviewing Past Tax Records

Take a close look at the last 3–5 years of:

• Tax returns
• Compliance records
• Outstanding liabilities
• State and local tax obligations
• Global tax exposure
• Audit histories

This review will uncover any potential risks or unresolved issues that might affect the deal.

Identifying Tax Benefits

Evaluate potential tax benefits that could impact the deal, such as:

• Net Operating Losses (NOLs): Confirm how much is available and review prior returns for accuracy.
• R&D Tax Credits: Document any unused credits and carryforwards.
• Property Tax: Check property valuations and explore reassessment appeal opportunities.
• State Tax Incentives: List available credits and obligations to maximize savings.

Exploring Deal Structure Options

The way a deal is structured can significantly impact taxes for both buyers and sellers. Here are the main options:

• Cash Transaction Structure
  • Requires immediate tax recognition.
  • Sellers face capital gains taxes upfront.
  • Buyers benefit from a step-up basis and depreciation advantages.
• Stock Transaction Structure
  • May qualify as a tax-free reorganization.
  • Offers opportunities to defer taxes.
  • Must comply with specific tax code rules.
• Hybrid Structure
  • Combines cash and stock components.
  • The ratio is tailored to the tax positions of both parties.
  • Balances immediate tax costs with deferral benefits.

According to Phoenix Strategy Group, early tax planning is key to addressing short-term tax issues while maintaining long-term efficiency. These strategies lay the groundwork for managing tax implications after the deal is finalized.

Cash Deal Tax Effects

Cash transactions come with immediate tax responsibilities that need careful planning. Below, we break down how these deals impact taxes for both sellers and buyers.

Seller Capital Gains Tax

When a seller closes a cash deal, they face capital gains tax. The exact tax owed depends on several factors:

• Long-term capital gains rates: These are currently 0%, 15%, or 20%, depending on your income level.
• Taxable gain calculation: This is the difference between the sale price and the adjusted tax basis of the asset.
• Asset allocation: How the sale is categorized (e.g., goodwill, equipment) affects how taxes are applied.

For instance, if a business sells for $10 million and has an adjusted basis of $3 million, the $7 million gain will be taxed as a capital gain. On top of federal taxes, state taxes might apply, ranging from 3% to 13%, depending on where the transaction occurs.

Buyer Tax Planning

Buyers in cash deals also face specific tax considerations. Addressing these early can improve financial outcomes.

Depreciation Benefits

• A new depreciation schedule begins based on how the purchase price is allocated.
• Cost segregation studies can help accelerate depreciation for certain assets.
• Bonus depreciation may be available for qualified property.

Financing Considerations

• Interest on acquisition loans is often tax-deductible.
• The structure of the debt can influence available tax benefits.
• Some transaction costs may need to be capitalized instead of deducted immediately.

To make the most of their tax position, buyers should:

• Review the target company’s tax history during due diligence.
• Structure financing to maximize interest deductions.
• Time the deal strategically around the tax year-end.
• Plan for the tax treatment of post-acquisition integration costs.

Early preparation and a clear understanding of these factors can help both sellers and buyers navigate the tax landscape effectively. Working with skilled tax advisors is crucial for spotting opportunities and staying compliant with tax laws.

Stock Deal Tax Effects

Stock transactions can offer tax benefits compared to cash deals, particularly when it comes to deferring or even avoiding immediate tax obligations. However, they require careful planning and thorough analysis from both buyers and sellers.

Requirements for Tax-Free Treatment

For a stock deal to qualify for tax-free treatment, it must follow specific guidelines. The transaction should ensure the business continues operating and that shareholders retain a significant stake. This is typically achieved by conducting most of the transaction through a stock exchange.

Options for Tax Deferral

Companies can delay recognizing tax liabilities, allowing them to better align with long-term goals. However, achieving this requires a detailed approach, including proper analysis and thorough documentation of the transaction.

Important Planning Factors

To make the most of these strategies, careful planning and detailed record-keeping are essential. Using clear performance metrics and reliable data systems can help ensure favorable tax outcomes while meeting all regulatory standards.

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Tax Management After Close

Once the deal is finalized, managing tax obligations becomes a key focus to ensure long-term financial success. Post-merger tax integration requires efficient data handling and strong collaboration between teams. This phase builds on earlier tax planning to ensure everything aligns smoothly after the merger.

Combined Company Tax Filing

Filing taxes for the merged entity requires careful coordination between the financial teams of both companies. A unified approach ensures compliance and builds on the groundwork laid during the pre-deal tax review. Keeping financial records clean and organized is critical for accurate reporting.

Here’s how to streamline tax filing operations:

• Merge financial data into a single system for consistency
• Define clear performance goals for the new combined tax team
• Hold regular meetings to address any integration challenges

"Hire PSG if you want to make your life easier and have accurate data." - Michael Mancuso, CIO, New Law Business Model

Making the Most of Tax Benefits

Accurate tax filing is just the beginning. Post-merger, there’s an opportunity to maximize financial outcomes by utilizing available tax benefits. With proper planning, you can take advantage of benefits like Net Operating Losses (NOLs) in line with IRS guidelines.

Key steps for leveraging tax benefits include:

• Documenting thoroughly all tax advantages from both companies
• Timing usage strategically to get the most value
• Seeking expert advice to ensure proper application and compliance

Required Tax Documents

Having the right documentation is essential for M&A transactions. It ensures compliance with federal and state tax laws, avoids costly delays, and reduces the risk of audits. Staying organized can make a big difference in keeping the transaction process on track.

IRS Forms and Price Allocation

When it comes to purchase price allocation, detailed records are key to meeting IRS standards. These records show how the transaction value was divided among different asset categories and can serve as evidence if the IRS ever reviews the deal.

Here’s what you’ll need:

• Asset Valuation Reports: These reports should outline the fair market value of both tangible and intangible assets, such as:
  • Property, plant, and equipment
  • Customer lists and contracts
  • Patents and trademarks
  • Goodwill calculations
• Transaction Structure Documentation: Clearly show whether the deal is an:
  • Asset purchase
  • Stock acquisition
  • Merger agreement
  • Tax-free reorganization
• Supporting Financial Records: Maintain complete financial statements and tax returns for both parties, covering at least the last three years.

State Tax Requirements

State-level tax compliance can add complexity to M&A transactions. Each state involved may have its own filing requirements and deadlines, which must be followed to avoid penalties.

Key state tax documents include:

• Bulk sales notifications to the appropriate state departments
• Sales and use tax certificates for asset transfers
• Real estate transfer documentation for any property in the deal
• State-specific forms for reporting changes to the business structure

"Hire PSG if you want to make your life easier and have accurate data." - Michael Mancuso, CIO, New Law Business Model

Phoenix Strategy Group recommends using reliable due diligence systems to organize financial data and generate detailed reports. This preparation ensures you’ll have all the documents you need, exactly when you need them, during the transaction process.

Wrapping Up

Proper tax preparation can play a huge role in the success of an M&A transaction. By addressing tax considerations early and keeping detailed records, companies can protect themselves from risks while maximizing the value of the deal. These steps also set the foundation for working with experts to refine your tax strategy.

Partnering with Phoenix Strategy Group

Phoenix Strategy Group has supported over 100 M&A transactions, offering deep expertise in tax planning and deal structuring. Their approach blends financial planning with strategic advice to help structure deals in a tax-efficient way.

Here’s what their M&A support includes:

Your Next Steps

Here’s how to get started:

• Evaluate Your Tax Position: Collect the last three years of tax returns and financial statements. Look for existing tax benefits, credits, and any liabilities.
• Bring in M&A Tax Experts: Work with specialists who can guide you through complex deal structures and compliance needs.
• Stay Organized: Set up systems to manage and track all tax-related documents during the transaction process.

These steps provide a solid foundation for navigating your M&A tax strategy. With Phoenix Strategy Group’s fractional CFO services and their experience with over 240 portfolio companies, you’ll have the tools and expertise to move forward confidently.

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