New tax law impacts M&A in a way you would not expect

I wanted to give you a heads up in the case you had not already seen this that the new tax law has a hidden issue related to M&A.  Since it is so new there is no Code section to refer to, but Paragraph 1504 of the new law adds to the list of assets that are excluded from the definition of capital assets.


Prior law excluded copyrights, literary, musical, or artistic compositions, letters or memoranda, or similar property from the definition of a capital asset if the asset is held either by the taxpayer who created the property, or a taxpayer for whom the property was produced.  Seldom in M&A do we see these assets being transferred.  The new law however changes this considerably.  The new law adds to this list patents, inventions, model or design, and a secret formula or process which is held by the taxpayer who created the property (or for whom the property was created).

The added items are encountered many time in the sale of a business.  The problem is that these items are intangibles and the value of these items have, historically been included in the portion of the purchase price that is allocated to goodwill.  Goodwill is a capital asset, and therefore subject to capital gains tax, whereas the previously mentioned items are not capital assets if the sale occurs in 2018 or later and must be excluded from goodwill value.  This give us an opportunity and creates some danger.  The opportunity is now we have another category of purchase price we can negotiate, the danger is if we do not separately state the allocation to these assets and they accidentally end up in the goodwill allocation the IRS could, upon audit make a sizable adjustment for the portion of the goodwill that they deem to be the value of these excluded items.  Fair Market Value in a sale between unrelated parties is whatever they agree upon.  If they do not agree then the IRS will have the ability to create a value.  In most cases the value of a business in excess of the value of its tangible personal or real property is considered “goodwill”.  This represents the value of the cash flow in excess of the tangible asset value.  If the business makes its money from the production of a product that has a patent or uses a secret formula then much of this excess value may actually be attributable to the patent or secret formula, which would render that portion of the purchase price subject to ordinary income tax rates and not be treated as capital gains.  If the value of these excluded assets are separately stated and the value is agreed to in the purchase agreement the IRS would have a hard time adjusting it.

The bottom line is if the business possesses any of the excluded assets it would be wise to allocate a negotiated portion of the purchase price to this class of assets.

Let me know if I can help further.

Harold F. Ingersoll, CPA/ABV/CFF, CVA, CM&AA

Partner at Atchley & Associates, LLP

Tax planning critical when buying a business

If you acquire 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, if you neglect tax issues during the negotiation process, the negative consequences can be serious. To improve the odds of a successful acquisition, it’s important to devote resources to tax planning before your deal closes.

Complacency can be costly

During deal negotiations, you and the seller should discuss such issues as whether and how much each party can deduct their transaction costs and how much in local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures (such as asset sales) that typically benefit buyers have negative tax consequences for sellers and vice versa. So it’s common for the parties to wrangle over taxes at this stage.

Just because you seem to have successfully resolved tax issues at the negotiation stage doesn’t mean you can become complacent. With adequate planning, you can spare your company from costly tax-related surprises after the transaction closes and you begin to integrate the acquired business. 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 postmerger synergies. However, if your taxation projections are flawed or you fail to follow through on earlier tax assumptions, you may not realize such synergies.

Merging accounting functions

One of the most important tax-related tasks is the integration of your seller’s and your own company’s accounting departments. There’s no time to waste: You generally must file federal and state income tax returns — either as a combined entity or as two separate sets — after the first full quarter following your transaction’s close. You also must account for any short-term tax obligations arising from your 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 you’ll retain. If you and your seller use different tax processing software or follow different accounting methods, choose between them as soon as feasible. Understand that, if your acquisition has been using a different accounting method, you’ll need to revise the company’s previous tax filings to align them with your own accounting system.

The tax consequences of M&A decisions may be costly and could haunt your company for years. We can help you ensure you plan properly and minimize any potentially negative tax consequences.

© 2017

The basics of pushdown accounting

Both public and private companies can elect to use “pushdown” accounting when there’s a merger, acquisition or other change-in-control event. What does this mean — and when might this alternative reporting method be advantageous?

Understanding your options

Pushdown accounting refers to the practice of adjusting an acquired company’s standalone financial statements to reflect the acquirer’s accounting basis rather than the target’s historical costs. Typically, this means stepping up the target’s net assets to fair value and, to the extent the purchase price exceeds fair value, recognizing the excess as goodwill.

In 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force). The updated guidance made pushdown accounting optional for all companies.

Reporting post-M&A performance

Whether pushdown accounting is appropriate depends on a company’s particular circumstances. For some companies, there may be advantages to reporting assets and liabilities at fair value and adopting consistent accounting policies for both the parent and subsidiary. Other companies may prefer not to apply pushdown accounting to avoid the negative impact on earnings, often associated with a step-up to fair value.

Previously, U.S. Generally Accepted Accounting Principles (GAAP) provided little guidance on when pushdown accounting might be appropriate. For public companies, SEC guidance generally prohibited pushdown accounting unless the acquirer obtained at least an 80% interest in the target, and it generally required pushdown accounting when the acquirer’s interest reached 95%. The SEC has rescinded portions of its pushdown accounting guidance, bringing it in line with the FASB’s new standard.

Weighing your options

For each individual change-in-control event, acquired companies must evaluate the option to apply pushdown accounting. And once pushdown accounting is applied, the election is irrevocable. Acquired companies that apply pushdown accounting in their standalone financial statements are required to include disclosures in the current reporting period to help users evaluate its effects. Contact our A&A specialists for help deciding whether to elect this reporting option.