For most company buyers, taxes are a priority when negotiating a purchase price. However, if tax issues are neglected during the integration phase, the negative consequences can be serious. To improve the likelihood of a successful merger, it’s important to devote resources to intensive tax planning before — and after — your deal closes.
During deal negotiations, you and the seller will likely discuss issues such as deductibility of transaction costs and the amount of local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures such as asset sales can benefit one party and have negative tax consequences for the other, so it’s common to wrangle over taxes at this stage, says Sean Muller, partner-in-charge of Houston Tax and Strategic Business Services at Weaver.
“With adequate planning, companies can be spared from costly tax-related surprises after the transaction closes and integration of the acquired business begins,” Muller says. “Tax management during integration can also help your company capture synergies more quickly and efficiently.” You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via post-merger synergies. However, if your tax projections are flawed or you fail to follow through on earlier tax assumptions, such synergies may not be realized.
Smart Business spoke with Muller about tax planning after the deal closes.
What is one of the most important tax-related tasks in a deal?
Integrating accounting departments is critical, and there’s no time to waste. The seller may have to file federal and state income tax returns or extensions either as a combined entity with the buyer or as a separate entity within a few months following the transaction’s close. Companies must also account for any short-term tax obligations arising from the acquisition.
To ensure the two departments integrate quickly and are ready to prepare the required tax documents, decide well in advance of closing which accounting personnel to retain. If different tax processing software or different accounting methods are used, choose between them as soon as feasible. Understand that, if your acquisition has been using a different accounting method, you’ll need to revise previous tax filings to align them with your own accounting system.
What are the major areas of concern for companies related to tax planning and operational synergies?
Before starting to integrate products, personnel and facilities, examine the tax implications of those actions. Major areas of concern include:
- Supply chain integration. Combining the logistical operations of both companies may make fiscal sense on paper, but there could be tax consequences. Say, for example, that you’re planning to close your seller’s main warehouse and fold operations into your company’s existing warehouse facilities. What if the acquisition’s warehouse is domiciled in a more favorable tax locale than your warehouse?
- Divestitures and sell-offs. Buyers often spin off unwanted divisions or products when they acquire a business, but from a tax standpoint such moves can be costly. For example, selling a segment could eliminate certain tax write-offs or protections. You also need to plan for the tax consequences of selling newly acquired assets.
- Global implications. International acquisitions can be a tax minefield. Companies should keep in mind the kinds of new exposures the deal carries, such as value-added taxes. Also, consider how a foreign purchase may affect your company’s effective tax rate. Be sure your M&A advisory team includes people who are knowledgeable about the relevant tax laws.
- Enterprise resource planning (ERP). If the two companies’ ERP systems aren’t merged and synchronized, data collection could slow or you could lose tax data. This could affect the accuracy and speed of the combined organization’s financial reporting.
When acquiring a company, your to-do list will be long, which means you can’t devote all of your time to the deal’s potential tax implications. However, the tax consequences of M&A decisions may be costly and could impact your company for years. So, if you don’t have the necessary tax expertise in-house, work with outside advisers that do. ●
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The government has increased tax rates and implemented other changes for 2013. However, companies may be able to employ tax-saving options — deductions, depreciation provisions or deferrals — prior to Dec. 31.
If companies review before year-end, they are better able to maximize potential savings, and it may even spur thoughts for future tax planning, says Sean Muller, partner-in-charge, Houston Tax and Strategic Business Services at Weaver.
Smart Business spoke with Muller about the opportunities to save on your 2013 taxes.
How can businesses utilize enhanced Section 179 deduction limits in 2013?
Enhanced Section 179 deduction limits were enacted for 2013, which allow companies to immediately deduct up to $500,000 of equipment purchases made, rather than depreciating over a number of years.
The deduction applies to 2013 equipment purchases of up to $2 million. The deduction is slowly phased out for taxpayers with $2.5 million or more in purchases. Section 179 deductions can be applied toward tangible property purchases, but real property doesn’t qualify.
In 2014, the Section 179 limitation will decrease to $25,000. Companies that plan to make large capital expenditures in 2014 may wish to purchase in 2013 instead. The deduction can be used to reduce tax liability to zero, but it cannot put you in a net loss position.
How does bonus depreciation differ?
Taxpayers in some states may be able to utilize a 50 percent bonus depreciation rate for qualified property placed in service during 2013. Unlike the Section 179 deduction, bonus depreciation is not limited to net income and does not limit the deduction amount.
Bonus depreciation applies to new, original use U.S.-based property with a recovery period of 20 years or less.
The 50 percent bonus depreciation and Section 179 deduction can be used together.
What savings are available through like-kind exchanges?
Another tax-saving opportunity to consider is like-kind exchanges. IRS Code Section 1031 enables a taxpayer to defer capital gains tax if the property sale proceeds are reinvested in similar property within a relatively short time. The exchange may be a simultaneous swap of properties or a deferred exchange. With a deferred exchange, one property is disposed of and the proceeds are then used to buy one or more like-kind properties.
Section 1031 exchanges exclude inventory, stocks, bonds and partnership interests.
Who can take domestic production activity deductions (Section 199)?
In 2013, businesses with qualified domestic production activities may be able to receive a 9 percent tax deduction. Qualifying activities include the manufacture, production, growth or extraction of qualifying production property within the U.S., as well as real property construction, oil and gas drilling, and engineering and architectural services related to real property construction.
Generally, a taxpayer is allowed a deduction equal to the lesser of:
- Qualified production activity income (QPAI), which is a modified calculation of income related to qualifying production activities.
- Taxable income.
- 50 percent of the form W-2 wages deducted in arriving at QPAI.
The level of complexity in calculating the appropriate deduction depends on the nature and structure of the business.
What are other year-end tax strategies?
Companies also should consider potential residual tax-saving activities, such as:
- Deferring income to 2014 if cash flow and current income permit.
- Making additional charitable donations.
- Writing off and disposing of damaged or obsolete inventory to reduce carrying costs and garner tax deductions.
- Writing off bad debt that cannot be collected. Companies should keep supporting material like phone logs, correspondence, collection agency contracts, etc., to prove a reasonable effort was made to collect.
Invest the time now to plan for your 2013 taxes and reap the benefits later. ●
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