M&A Tax Planning: Ensure a Smooth and Cost-Effective Transaction

In 2024, the global mergers and acquisitions market saw an average transaction value of US$181 million, with the United States leading the way, reaching a transaction value of US$1,359 billion. This shows the growth of mergers and acquisitions among the businesses.

However, M&A is not a simple business transaction; the process considers various aspects, including tax planning, and should make sure to have tax compliance.

Whether your company is acquiring or getting acquired, having proper M&A tax strategies in place will help to:

• Avoid unforeseen tax liabilities
• Eliminate double taxation in case of cross-border deals
• Ensuring tax compliance in M&A transactions

M&A tax planning is a complex process. It involves considering your company’s current tax position and federal and state laws for both parties. So, what tax strategies for mergers and acquisitions should you consider? The articles will help you understand that.

Key Objectives of M&A Tax Planning

M&A tax planning is necessary for the following reasons:

• Minimizing burden of the transaction – The basic reason for M&A planning is to reduce the overall burden for the buyer and seller. M&A tax planning will make sure that the transaction is structured to take full advantage of possible benefits and reductions.
• Structuring the deal – Establishing M&A tax strategies should aim to maximize tax savings. To do that, select the most suitable legal entity, decide whether to sell assets or stocks, and figure out how to finance the deal. Properly organizing your M&A transactions will help to guarantee good outcomes for both sides.
• Identifying and mitigating potential risks – M&A transactions generally involve many risks, which could result in penalties. Your M&A tax strategies will help you spot these risks early in the process.
• Guaranteeing compliance – Under the rules of IRC §1001, a merger or acquisition could be a taxable transaction or a tax-free IRC §368 reorganization.

Stages of M&A Tax Planning

There are various stages in M&A tax planning which require careful inclusion of several aspects.

Considerations in M&A Transactions

In the process of developing tax strategies for mergers and acquisitions, there are a few aspects that you should consider in your M&A transaction.

Entity selection and structure

When you decide to have an M&A deal, choosing the right entity structure is important as they have different tax consequences. There are two types in common.

• Asset purchase – You can select and acquire assets from the target. This type of acquisition gives a step-up in basis benefits and increased depreciation benefits.
• Stock purchase – In this type, you will acquire the target company entirely, as well as the tax attributes.

Strategy to use

Use tax-efficient deal structures, such as tax-free reorganizations, as your strategy. With this, you get or sell the target’s assets without creating the income tax effects that would follow from a sale or purchase of assets.

Tax attributes and carryovers

Knowing the target company’s tax characteristics — net operating losses (NOLs), credits, and deductions — opens chances for optimization. However, the capacity to use these qualities relies on following complex laws, including the IRS’ Code Section 382 restriction on NOL carryforwards.

Strategy to use

To maximize the use of attributes like net operating losses (NOLs) in an M&A transaction, structure the deal to minimize the impact of IRS Section 382 limitations on NOL carryforwards.

Cross-border tax implications

If you plan to have a cross-border M&A deal, double taxation could occur. Also, under the business inversion regulations, some acquisitions could cause negative results. Establishing a strong transfer pricing plan guarantees compliance with international rules and reduces the possibility of double taxation for cross-border transactions.

Strategy to use

To improve benefits and simplify compliance, you should have planning strategies for combining operations and tax reporting processes with the merged company. To do this effectively, you should review both companies’ positions and consider all the credits and deductions.

Equity compensation and benefits

The tax consideration for an employee’s equity compensation during an M&A transaction depends on what you decide to do with the stock options. Cancelling the stock-based compensation and providing a cash payout instead of equity will incur payroll.

Strategy to use

Employees may use deferral opportunities to defer liabilities by rolling over equity into the acquiring company’s stock, reducing immediate tax burdens.

Case Studies – Successful M&A Tax Planning

M&A Case Study in Energy Sector: Vistra + Dynegy

The Texas-based company Vistra Energy was established after its predecessor TCEH Corp. went bankrupt in 2016. Due to the serious economic crisis that affected the company, it was subjected to corporate changes to cut costs and improve the processes.

In the year 2017, Vistra acquired Dynegy to become one of the top power generation companies in the United States of America. All of the synergies relating to the post-tax FCF were gradually realizable by 2019 and were estimated to be at an annual rate of $320 million, this was nearly 400 percent higher than the earlier target. The actual in 2019 was $210 Million.

Vistra was also able to use around $4 billion of net operating loss carry-forwards that they got from the merger to gain around $900 million tax shield.

Therefore, the merger with Dynegy provided an opportunity for Vistra to expand its operations in the US in the new regions, diversify the sources of its revenue, manage the risks effectively, and develop further. They also converted electric power from coal to natural gas while bringing down the costs and taxes as well.

What Are the Best Practices for Managing Tax Risks in M&A Transactions?

While implementing your M&A tax strategies, following the below best practices is crucial to avoid tax risks.

Planning and due diligence

While developing the procedures and practices you undertake in tax planning, try to make it all-inclusive, involving all the nuances and research to identify potential risks and opportunities. This includes reviewing the liabilities of both parties and their previous compliance records, in addition to looking at any other exposures that may affect the worth of the transaction.

Consistent reporting and allocation

As part of M&A tax planning, find whether the companies engaged regularly disclose income, expenses, and obligations to lower risks. Variations between tax and financial reporting might cause disallowances and background checks. Make sure the Purchase Price Allocation (PPA) falls within the set limitations, improving openness and preventing problems.

Managing attributes and liabilities

You should carefully evaluate tax attributes such as the net operating loss, credits, and depreciation to maximize benefits post-transaction. You should also analyze and handle any claims that have been passed down. Considering all the factors can help you maximize the benefits from the target and prevent you from future risks.

Post-closing integration and optimization

After finalizing the merger and acquisition (M&A) deal, you must make sure that the combined companies’ tax planning and reporting features line up. Continuous liability monitoring and investigation of opportunities for the tax-efficient structural arrangement of the new company combination should be part of this integration process.

Seeking expert guidance

To overcome issues and to plan for effective M&A tax strategies, it would be best to get expert guidance. Tax professionals or financial advisors will have a deep understanding of laws and planning that can make a big difference in how successful your transaction is. They can help you create M&A strategies that avoid unwanted taxes that comply with rules.

How Can Eqvista Help With Your M&A Tax Planning?

Creating M&A tax strategies can help improve your overall transaction. To have effective tax planning that helps you now and in the future, Eqvista supports you in the following.

• Comprehensive tax advisory services – At Eqvista, we follow a comprehensive approach to make sure to include all the minute details in your M&A transaction tax-efficient manner. We can advise you on how different deal structures can impact your taxes. Click here to learn more about our tax advisory services.
• Due diligence and risk assessment – Our expert team performs due diligence to discover and assess all risks in your M&A deal. We scrutinize your accounts, financial statements, records, and other documentation to offer solutions for achieving efficiency in overcoming concealed taxes in a deal. This enables you to understand the full extent of implications relating to the transaction before you conclude it.
• Deal structuring for tax efficiency – We know that it is likely that any combination of deal structures will attract a different charge. We explore and analyze different deal structures and the one that will suit you best in that particular circumstance. You may improve your overall outcomes by going for the right kind of acquisition.
• Regulatory compliance and reporting – Eqvista supports you in checking whether you meet all the tax-related regulatory requirements throughout the M&A transaction. We also provide accurate and timely reporting to comply with laws and regulations. This reduces your risk of legal issues and penalties, making sure of a smooth, compliant transition.

How Eqvista Enhances M&A Tax Planning for Better Outcomes

Developing M&A tax strategies requires experts to help you overcome tax complexities in your transaction. Each business type requires careful consideration. An ideal planning strategy depends on understanding laws, financial strategies, and regulations to be met.

With 15,000+ companies relying on our services, Eqvista tax and equity advisory services have established a reputation for handling complexities and besides our expertise in tax advisory services, we can help you conduct business valuations, which are mandatory during an M&A transaction. Our precise valuation report can help you negotiate better deals.

Want to know more about how we can help with your M&A deal? Contact us now!