Question

What are some tax implications that should be considered when a company is considering a merger or acquisition?

Answer 1

Tax issues to consider when a company is considering a merger or acquisition are-

1) Consider your transaction structuring options-

An asset purchase provides better tax results for the purchaser. We will be able to accelerate amortization of the acquired assets, which generates significant near-term cash flow benefits. We should also think about where to place acquired liabilities within our new combined entity in order to maximize federal, state and even international tax benefits.

2) Target company tax liabilities-

Our tax due diligence should explore the target company’s current and projected tax liabilities and how they will be addressed in our deal. Most deals include some level of indemnification for undisclosed tax issues. Always look at state and local and payroll tax issues. Those liabilities are sometimes overlooked in the planning process, but can be significant. In addition to existing liabilities, consider how the our new organization will affect our state and local tax posture going forward, not just for income taxes, but for sales and use taxes as well.

3)ordinary v/s capital assets-

If the assets being sold include inventory, depreciated asset,qor other "ordinary" income assets, ordinary tax rates will apply to net gains associated with the prior depreciation allowed or allowable. The sale of partnership assets or partnership interest can trigger ordinary gain to the extent of "hot assets" such as cash basis account receivables, depreciation capture, etc.