M&A Tax Talk

Importance of Valuations in M&A Tax Planning

October 2024

Valuations are integral to every phase of the M&A process, influencing financial, strategic, and tax planning outcomes. They also require a comprehensive and transparent process, leveraging accurate data and employing appropriate methodologies. During the M&A life cycle both a buyer and seller may require an understanding of the FMV or fair value of various businesses, entities, assets, or liabilities. This article explains how understanding valuation requirements associated with a deal and aligning with key stakeholders early on can help drive an efficient and collaborative process and ensure consistent tax reporting and future planning.

Essentials for a successful sale transaction

August 2024

As buyers and sellers address economic and global challenges in an uncertain M&A Market, one trend is clear: an increased focus on seller preparedness. Sellers are focused on an organized and thoughtful sell-side preparation process and tax departments may need to keep pace by investing time to prepare for the sale at the earliest possible stages. This article outlines how Tax directors can embody the role of a prepared seller from strategically structuring the transaction, facilitating a streamlined tax diligence process, and preparing carve-out financials.

IRS Enforcement and Priorities in M&A

July 2024

Given the IRS’s increased resources and focus on large taxpayers, businesses should be prepared for more audit activity by the IRS. When engaging in M&A transactions, taxpayers should consider the implications of the BBA regime and the potential for IRS scrutiny on specific areas that impact M&A transactions. This article examines BBA partnership considerations and IRS’s enforcement efforts related to success-based fees, costs that facility an IRC section 355 transaction, limitations on consolidated net operating loss carryovers, and sales of business assets or partnership interests.

Successor Tax Liabilities: Understanding the potential risks in M&A transactions

April 2024

Different tax successor liabilities will carryover to the buyer or be retained by a seller in an acquisition depending on the structure of the transaction. Buyers and sellers should be aware of what taxes to focus on in due diligence to understand the successor liability risks when acquiring a target business and potential dollars at risk, whether through a legal asset acquisition or in the acquisition of a legal entity. This article explains how understanding and identifying the potential tax exposure can help prepare both buyers and sellers for purchase agreement negotiations and can help mitigate unexpected cash tax outlays post-acquisition.

Transaction costs: Tax recovery and treatment

February 2024

As there is an increased focus on M&A preparation and strategy, one area that should not be overlooked is the potential tax “recovery” of transaction costs. Taxpayers should not oversimplify the approach to analyzing the recoverability of these costs and should be proactive in evaluating their treatment before permitting the deal process to advance too far. This article explores the many nuances and transaction specific considerations related to the recovery of transaction costs and outlines best practices for the treatment of these costs.

Navigating cross-border M&A in the Pillar Two World

November 2023

Pillar Two is the OECD’s approach to ensuring that multinational entities (MNEs) with a consolidated revenue of at least €750 million pay a global minimum tax of 15% in every jurisdiction where they operate. Transactions happening now and from 2024 onwards may already impact the MNEs’ future Pillar Two position and potential Pillar Two (top-up tax) liabilities. Therefore, Pillar Two considerations should be factored into a deal’s cost, contractual documentation, and information sharing. This article explains what Pillar Two M&A considerations are top-of-mind, who the rules apply to, and what you can do today to address these rules and considerations.

CAMT: Corporate alternative minimum tax

July 2023

The 15-percent corporate alternative minimum tax (“CAMT”) is a new, complex provision and raises many issues regarding whether CAMT applies to corporations (or groups of corporations) and, if so, how to determine any CAMT liability. The CAMT has certain rules and features that could impact M&A activity. Given the new and limited interim guidance, there may be uncertainty as to the application of the CAMT rules, which also may create additional risk with respect to pre-closing tax liabilities for tax years beginning after December 31, 2022. This article further explains the new 15-percent CMAT and outlines additional M&A considerations, modeling, and diligence for corporations.

Legal entity rationalization: Is now the time?

May 2023

As the M&A environment experiences a decrease in activity, it gives companies a chance to turn the focus on other planning opportunities. One common planning idea is legal entity rationalization (LER), which streamlines an organization’s legal entity structure to achieve efficiencies and realize selling, general, and administrative cost savings, as well as potential tax savings. What type of organization is a strong candidate for this opportunity? How does an organization go about starting what could be a potentially daunting planning initiative? This article explores how to determine if LER is applicable to your company and how to get started if the time is now.

Debt restructuring transactions

April 2023

In light of increasing interest rates and uncertain macroeconomic conditions, many companies may need to consider refinancing or otherwise addressing their capital structure, including deleveraging. This article outlines key tax considerations associated with various debt restructuring transactions, including debt modifications, debt-for-debt exchanges, and debt-for-equity exchanges that may result in taxable cancellation of indebtedness (COD) income.

Inflation Reduction Act of 2022: Welcoming back corporate AMT 2.0

January 2023

In 2022, Congress approved and President Biden signed into law the Inflation Reduction Act (IRA), which includes several direct tax increases on businesses. This article provides a high-level overview of three areas in which the IRA made significant changes to corporate tax law and considers their potential impact on M&A transactions. Specifically, it looks at (1) the new corporate book-income alternative minimum tax, (2) the new excise tax on stock buybacks, and (3) the expansion of clean energy tax incentives.

Continuation funds: Potential tax opportunities and considerations

November 2022

While the term “continuation fund” may encompass different forms, appropriate consideration should be given to the tax implications when evaluating or negotiating a continuation fund of any form. Early tax planning guides structuring alternatives and may serve to mitigate potential adverse tax consequences, including the tax characterization of proceeds received by exiting investors and strategies to achieve tax-deferred treatment for rolling investors. Our latest M&A Tax Talk serves as an overview of the complex and nuanced tax planning considerations associated with continuation funds.

Leveraged distributions: Uses, potential implications, and tax considerations

September 2022

Investors and shareholders have several options available for early monetization of or a partial exit from their investments. One such option is to recapitalize their investment with a leveraged distribution, either through a cash distribution/dividend or a share buy-back. In this article, we explore the definition of a leveraged distribution and the potential tax implications that should be considered.

Monetization techniques in Spin-offs

July 2022

The tax-free spin-off rules in Section 355 provide a tax-efficient pathway for a corporation to dispose of a business without corporate or shareholder-level tax. The spin-off rules also provide flexibility to partially monetize Distributing’s interest in Controlled in order to adjust the capital structures of both Distributing and Controlled on a tax-efficient basis. There are multiple methods to accomplish this, each with its own considerations and nuances under the tax rules.

Cash tax forecasting simplified

March 2022

A dynamic tax forecast model allows for scenario analytics and decision-making in a fast-moving transaction process. Such a forecast validates tax elements of the broader deal thesis–positioning the company for a well-informed purchase price and for post-closing enhancement and integration. Preparing such a forecast of a target’s cash income taxes does not need to be a daunting or burdensome task, using the framework in this article as a guide. 

Global trade considerations

December 2021

As global trade operations become more complex and strategically important to international supply chains, they also impact various facets of mergers and acquisitions. In this article we explore the importance of understanding the current and future global trade requirements in PMI or divestiture projects in order to allow sufficient lead time to address government and business requirements, enable overall business continuity, and add incremental value in the transformation.

Tax Factbooks

August 2021

In the evolving M&A marketplace, we are seeing Tax Factbooks as a pre-sale tax preparation option that may increase the efficiency of the tax diligence process. In this article, we discuss what a Tax Factbook is, where we see them in the marketplace, the benefits of having one prepared, and how a Tax Factbook differs from vendor due diligence.

State tax insights on debt

June 2021

As a business is evaluating the use of debt and interest within the structure of a US group, state tax implications can vary and may require additional consideration. In this article, we examine how taxpayers can avoid adverse tax consequences by evaluating certain issues such as debtor identity and the differences between state and federal filing requirements, challenges in allocating existing debt, and the benefits of a co-obligor on a debt instrument.

Right as rain–Overview of the UP-C structure

March 2021

This article presents simple steps to assist organizations with their proactive planning, including implementation, the effects of exchange rights on legacy partners’ liquidity, methods to affect the exchange, and the tax receivable agreement. We focus on how the owners of pass-through legal entities can benefit from access to public capital markets, even while maintaining a single layer of tax and not being subject to publicly traded partnership rules.

The case for estate planning pre-sale

November 2020

As taxpayers assess whether to sell a business, estate planning may be a key driver of the decision related to the timing and structure of a divestiture. This article examines the case for pre-sale estate planning and outlines external factors, including market volatility, historically low interest rates, and an all-time high estate tax exemption that may encourage business owners to be proactive with their estate planning. Proactive planning provides an opportunity to transfer long-term, life-changing wealth for one’s family in an organized and tax-efficient manner.

Tax implications of in-court and out-of-court debt restructurings

October 2020

A distressed company considering a restructuring or change in capital structure should consider the various tax implications of such proposed restructuring, including whether the restructuring occurs as part of a Title 11 bankruptcy filing or not. This article identifies common tax issues that a distressed corporation should carefully evaluate when considering restructuring alternatives.

Carve-out of financial statements

September 2020

When a corporate parent orchestrates a carve-out, spin-off, or sale of a portion of its business, the execution team may be responsible for preparing carve-out financial statements. Regardless of a company’s divestiture hypothesis, early and continuous involvement of tax professionals in preparation of carve-out financial statements will help to facilitate a successful process. This article examines some of the income tax considerations when preparing carve-out statements and presents pragmatic steps to address this complicated area of financial reporting.

Abandoned transactions

August 2020

Due to economic uncertainty, many types of M&A transactions are being abandoned. As part of pursuing a transaction, businesses may incur a wide range of costs, some of which may be deemed facilitative of the transaction and are generally required to be capitalized. However, if a transaction is determined to be abandoned, the taxpayer may be allowed an abandonment loss for these costs. Before taking an abandonment loss, there are many important factors a taxpayer should consider.

Economic disruption and tax losses: restructuring businesses at depressed valuations

July 2020

In today’s uncertain economy, business valuations have declined, and tax planning has been redirected. Business restructurings may be less focused on transactions that reduce taxable gain and more focused on the impact of unrealized tax losses. This article outlines approaches that highlight the importance of tax consequences in corporate restructurings, especially for taxpayers with unrealized tax losses.

Tax considerations when selling a subsidiary out of a consolidated group

June 2020

Today’s economic uncertainty is driving many companies to divest of underperforming businesses to help identify potential tax cash flow. Given the depressed values of businesses, sellers are looking to increase returns by structuring sales to help reduce taxes and increase the utilization of existing tax attributes while also identifying tax benefits for potential buyers. While corporate divestitures often present numerous complicated tax considerations, special rules can apply when unwanted businesses are held alongside other wanted businesses in a single tax-consolidated group.

Can a business be brought out of corporate solution tax-free? A Reverse Morris Trust transaction may be the only answer

May 2020

In the world of taxation for business entities, a single level of taxation is ideal. Unlike “flow-through” entities, a C corporation generally results in two levels of taxation. These distinct levels of taxation apply to both operating income and income gained from the disposition or distribution of assets held by the C corporation. Accordingly, C corporations have been compared to lobster traps: Easy to enter and painful to get out of. To bust the corporate lobster trap, a Reverse Morris Trust (RMT) transaction may be the only answer.

Protecting tax attributes in an uncertain environment

April 2020

The increased likelihood of companies generating net operating losses (NOLs), coupled with depressed stock prices for those companies resulting from recent economic disruptions, has caused companies’ executives and tax professionals to consider implementing defensive measures, such as stock transfer restrictions or “poison pills,” to protect NOLs and other tax attributes from the adverse impacts of an “ownership change.”

The IRS and Treasury issue significant revisions to the applicability date provisions of the proposed section 382(h) regulations

April 2020

As previously discussed in the October edition of Deloitte’s M&A Tax Talk series, the Treasury and the IRS issued proposed regulations in September 2019 regarding a corporation’s ability to utilize net operating losses (NOLs) and other tax attributes following an ownership change within the meaning of section 382. In January, the Treasury and the IRS issued significant revisions to the applicability date provisions of these proposed regulations.

Debt modification tax rules

March 2020

Given the broad definition of “publicly-traded” under the tax rules, many debt instruments are treated as publicly-traded, including revolvers. This increases the likelihood that a “significant modification” of the debt would result in “phantom income” to the debtor company. If your company is modifying or restructuring existing debt, it is important that an analysis be performed to determine whether a “significant modification” has occurred and whether the debt is “publicly-traded,” as this could result in unexpected income inclusions for tax purposes.

Indirect tax considerations in M&A transactions in a post-Wayfair world

January 2020

The Wayfair ruling significantly changed when a state requires sales/use tax to be collected by remote sellers. This month we examine how the 2018 Wayfair court decision impacts buyers and sellers involved in M&A transactions. We’ll outline how the court decision impacts the determination of sales tax collection obligations and discuss sales tax considerations that should be addressed by both buyers and sellers.

PIPEs: Potential tax opportunities and considerations

2020

During periods of economic uncertainty, public companies may be faced with an urgent need to raise capital. Private investment in public equity (PIPE) transactions has become an attractive investment opportunity for private equity funds that can provide much-needed liquidity and other financial benefits to public companies. When executing PIPE transactions, appropriate consideration should be given to the tax implications. Early tax planning will inform and may serve to mitigate potential “phantom income”, withholding taxes, and other adverse tax consequences.

IPOs and the resurgence of SPACs

2020

Exit strategies involving IPOs present unique tax considerations and potential opportunities that can drive value to private equity funds and portfolio companies. Recently, IPOs undertaken via a SPAC have gained momentum and may have additional business and tax complexities.

Representation and warranty insurance

November 2019

The robust and competitive M&A market has led to an increase in representation and warranty insurance (RWI) policies, which has transformed the M&A process. This month we outline some of the key tax-related issues that RWI addresses, including its ability to protect a buyer against a seller’s breach of representation, and warranties included in an acquisition agreement. In addition, we’ll look at how RWI can help both buyers and sellers speed up – or even eliminate–the escrow process.

Proposed regulations would significantly impact the value of tax attributes following an ownership change

October 2019

This month, we examine the proposed rule changes that could significantly limit a corporation’s ability to utilize net operating losses (NOLs) and other tax attributes following an ownership change.

Specifically, we’ll examine how these proposed changes could impact an organization’s tax burden and identify some potential actions NOL companies—and buyers of such companies—should consider to ameliorate the negative effects that companies could face following an ownership change.

In January 2020 the IRS issued significant revisions to the applicability date provisions of the proposed section 382(h) regulations.

Divestiture-related tax considerations

September 2019

If you’ve ever sold a home, you know that preparation is key to achieving the best price. You make minor repairs, upgrade outdated appliances, put on a fresh coat of paint, and stage the home to make it attractive to potential buyers.

In many ways, selling a business is similar, except that your preparation is different. Specifically, it is critical to develop an understanding of the tax work that should be addressed in advance of starting negotiations.