Tax Implications Of Your M&A Deal: An Overview For Business Owners
When working out the different aspects of the collaboration, don’t overlook the tax implications of your M&A deal. Mergers and acquisitions have strategic benefits and successfully add value to the legacy company. However, buyers and sellers should also understand their tax obligations.
When working out the different aspects of the collaboration, don’t overlook the tax implications of your M&A deal. Mergers and acquisitions have strategic benefits and successfully add value to the legacy company. However, buyers and sellers should also understand their tax obligations.
Working with an expert M&A advisor is advisable since the professional will guide you on the various aspects. You’ll also have an attorney, CPA, and tax consultant on board for regulatory compliance and understanding the applicable taxes.
M&As typically involve significant federal and state tax liabilities. When structuring the transaction, you’ll work out how to model the deal after analyzing the tax dues. To put it simply, merger and acquisition deals can be taxable or non-taxable.
This categorization relies on how the dealmakers handle the stock and assets of both companies and how payments are made. Read ahead to understand in detail the tax implications of your M&A deal.
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Merger Categories for Tax Considerations
When two companies enter into a strategic merger, they must pay taxes on the gains from the assets they acquire. These assets can be in the form of capital, stock, and other fixed assets pooled during the merger. Taxable mergers according to IRC §1001 can be standard and triangle.
- In a standard merger, the acquirer absorbs the purchased company into their own company. The legacy company continues offering products and services that the two companies provided before the merger.
- A triangle merger is a collaboration between two smaller companies. In this case, one company is the subsidiary of a parent company which assumes the tax liability and financial responsibility.
How Mergers Qualify as Reorganizations
A third form of mergers is a reorganization and does not attract any tax liability under IRC § 368. However, for the deal to be tax-exempt, it must comply with stringent criteria that the IRS lays down. These criteria include several statutory and common law requirements for the dealmakers.
- When one corporation acquires the assets and stock of another corporation
- When one corporation splits and creates two or more independent entities
- The corporation restructures its capital composition internally.
How Tax Exemptions Work
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