A merger or acquisition rarely runs smoothly. Having the right professionals on your team and knowing what questions to ask can help ease any tax challenges. Here are eight questions to help transition from separate entities to consolidated or subsidiary status.
1. Will the acquired company merge with the parent (acquiring) organization, or will it become a subsidiary?
How the parent or acquiring organization plans to merge the target company into its business can affect what paperwork is filed, when dates are cut off, and more. Knowing whether the target company will be merged into the business or held as a subsidiary can prevent headaches caused by duplicating efforts down the road.
2. Is the purchase a stock acquisition or asset acquisition?
It’s important to know whether the transaction will be treated as a stock acquisition with basis carryover, common for C corporations and some S corporations, or if it will be an asset acquisition with basis re-evaluation. This affects everything from what forms are required to the tax attributes that carry over and how liabilities are assumed.
3. Will a shortened tax period be required?
There are cases where shortened tax periods are needed. With stock acquisitions, this could be caused by the target company joining a new consolidated tax filing. That means the tax year for both needs to end before the acquisition, and the new tax year begins for the consolidated filing period. Asset acquisitions usually do not require a shortened tax year, but some exceptions can trigger one.
4. What are the potential challenges to calculating taxable income for tax filings?
Taxable income generally should be calculated for both pre-and post-transaction periods, but there are times when additional analysis may be needed, including when the Financial Accounting Standards Board (FASB) Accounting Standards Topic 805 is in play, if a blackout period is utilized, and if there are discrepancies caused by Generally Accepted Accounting Practices (GAAP) Section 461 on liabilities. In addition, items such as professional fees, equity compensation, transaction bonuses, and severance or retention packages should be reviewed to determine if you can deduct them and how much of the amount can be applied.
5. Are additional tax forms required to be filed at any point?
Most mergers and acquisitions require additional filings with the IRS. The type of acquisition and the nuances of the transaction determine what is needed. Examples of forms you may include are:
- Form 1122: Authorization and Consent of Subsidiary Corporation
- Schedule O: Consent Plan and Apportionment Schedule
- Form 5471: Information Return of U.S. Return of Persons With Respect to Certain Foreign Corporations
- Form 5472: Information Return of a 25% Foreign-Owned U.S. corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
- Form 8858: Information Return of a U.S. Persons With Respect to Foreign Disregarded Entities
- Form 926: Return by a U.S. Transferor of Property to a Foreign Corporation
- Form 8832: Entity Classification Election
- Form 8594: Asset Acquisition Statement Under Section 1060
- Form 8023: Elections Under Section 338 for corporations Making Qualified Stock Purchases
- Form 8883: Asset Allocation Statement Under Section 338
6. What, if any, tax attributes will be carried over?
In some transactions, net operating losses (NOL) and tax credits are carried over. For example, these attributes stay with the target organization and its new group in a stock acquisition. However, GAAP Sections 382 and 383 impose a limit on the use of these defined by the adjusted long-term applicable federal rate multiplied by the corporation’s value on the change date. To use this, the target business must continue operating for at least two years.
7. How will new debt be recognized?
New debt often is a result of a merger or acquisition. First, determine if the proper characterization is debt or considered equity. Then review the impact it may have on the GAAP Section 382 limitation, the financing costs, what portions of the debt may be deductible, future compliance filing requirements, if old debt needs to be retired, and any interaction with the NOL.
8. At what point does the M&S specialist hand off the project to a general tax specialist?
At some point, the M&A tax consultant will hand responsibility to the tax compliance advisor or industry tax director. Understand when this needs to happen, so you know who to contact and when to help keep the project moving.
If your business is considering a merger, acquisition, or sale to another organization, having a knowledgeable consultant on your team is important to help the transaction run as seamlessly as possible. Learn about our M&A support services here.
Treasury Circular 230 Disclosure
Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.