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Maximizing Tax Benefits in Business Transactions: Key Considerations for Acquisitions

When making any purchase or sale, buyers and sellers must consider the possible tax implications that may arise from the structure of the transaction. Without careful thought and consideration, there can be unanticipated consequences and costs that come as an unwelcome surprise. While there are many considerations to consider when structuring a stock/equity versus an asset transaction, this article focuses on tax attributes.

Importance of Tax Attributes

Tax attributes are a critical factor to consider for both buyers and sellers, as they can profoundly shape how the transaction is structured. When considering a C corporation target company, the buyer needs to assess any potential future tax benefits like net operating loss and/or credit carryforwards, such as R&D tax credit carryforwards that may be available. Careful evaluation of these situations will ensure maximum value and benefit from the acquisition.

Tax Attributes in Stock Transactions

In a stock transaction, tax attributes generally carry over to the buyer and have the potential for utilization in future years. However, if the acquisition of stock surpasses a 50-percentage point alteration in ownership over a three-year-period, it is essential to evaluate any applicable tax attributes further and determine whether or not restrictions imposed by IRC Sections 382 or 383 could impede the buyer's capacity to use such attributes. Additionally, tax attributes can also be subject to prior limitations in situations where the company being acquired used its equity to raise capital.

Tax Attributes in Asset Transactions

Sellers should carefully consider the implications of tax attributes when planning an asset sale since tax attributes do not carry over to the buyer in this type of transaction. In this instance, the selling company can leverage the tax attributes to offset taxes related to any profits generated through the process if there aren't any limitations on them due to past ownership changes.

Structuring for Maximum Tax Benefits

By structuring a stock transaction as an asset deal, sellers can enjoy potential tax savings and benefit from the ownership change. To maximize the advantages of such transactions, those involved typically determine which model offers more favorable taxation consequences—the stock or asset deal—and pursue it accordingly. Buyers and sellers should be thoughtful about the structure of their transactions. Tax attributes are not the only factor to consider when buying or selling a business; many more elements must also be evaluated. To arrive at the most advantageous transaction structure, buyers and sellers should contemplate conducting due diligence in either a buy-side or sell-side capacity.