Of course, one of the main reasons for an acquisition is to change your company’s bottom line, but that isn’t just true in terms of income. An acquisition will also impact your firm’s tax liability—from when taxes are due to what entity can deduct an operating loss. That’s why you should be thinking about tax issues well before the acquisition takes place.
First, geography matters: Since a new company may mean new state and local taxes, it’s important to keep in mind that determining your company’s location can be more complicated than it first seems. Tax liability may be determined by where is the new company incorporated, but physical locations (from building leases to distribution centers) may also be a factor. And what about your new employees? Even before Covid turned so many positions into remote jobs, out-of-state employees can complicate tax issues.
For federal taxes, calculating your tax liability begins with the type of acquisition itself: Was the deal set up as an acquisition of the target company’s stock or an acquisition of the target’s assets?
If you acquired the company’s stock, then the tax will be based on the value of the stock equal to the consideration paid, and the target company’s assets will typically continue to be taxed based on their historic value.
If, however, you have an asset acquisition, then this will trigger a re-evaluation of the assets on current market value. This will likely lead to a step-up, based on an examination of the consideration you paid for the assets and the liabilities you also assumed.
The form of the acquisition even impacts when tax liability for the target company ends: For a stock acquisition, the tax year usually terminates at the time of the acquisition; however, this isn’t the case for an asset purchase.
Another important question to ask: How long will the target company remain a separate, ongoing business? Net operating loss and tax credits typically remain with the target company, and federal law puts many rules on how these losses can be used.
These examples just scratch the surface of the tax issues relating to an acquisition, but it should be clear: Tax implications aren’t something you should wait to address after the company is acquired. Instead, address them even before the deal is being structured.
Rod Atherton, JD
Attorney
Email Rod Atherton
(314) 454-9100
