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Some of the most complex transactions organizations can be involved in are mergers and acquisitions. In great part, this is because mergers and acquisitions have tax ramifications, impacting taxes at both the state and federal levels.

Lawyers well-versed in business law can guide you through the challenging and varied tax implications. Learn more about the key implications mergers and acquisitions can have on a company and its taxes. 

Business Law Basics: Understanding Mergers and Acquisitions

These two terms are generally used together, but they are not the same thing. Thus, they must not be used interchangeably.

In a merger, two separate entities become one new legal entity. Mergers usually function to reduce costs of operation, grow revenue, expand into new territories, and more. After a merger, the shares of the new company are distributed to existing shareholders of both original businesses. 

Acquisitions are more common than mergers. In an acquisition, the acquiring company buys the majority or all of the other company’s ownership stakes. This gives the buying company power over stocks, assets, and operations. However, both companies retain separate corporate identities. 

Structuring the Transaction: Asset or Stock Sale

The way you structure the transaction plays a major role in the tax implications of a merger or acquisition. Specifically, you can structure it as an asset or stock sale. 

When a buyer purchases individual assets of a target company but doesn’t take ownership of the entity, that’s an asset sale. This means the buyer doesn’t take on any of the company’s liabilities or cash but does own its net working capital. An asset sale allows the sale price of the assets to become a buyer’s starting tax basis. 

An asset sale allocates an increased value to these assets and restarts the depreciation process for the buyer. In return, the buyer receives an advantageous cash flow during the transition years. 

In a stock sale, the buyer purchases the target company’s stock, therefore taking over the entity. With stock sales, buyers don’t allocate a higher value to the assets so they don’t get to restart depreciation. 

The tax basis for the assets at the time of the purchase remains the same for the buyer. This means that you could lose out on depreciation deductions. 

Consider Net Operating Losses

Net operating loss (NOL) refers to when a company’s deductions exceed its taxable income during a tax period. NOLs can be an asset because you can use them to offset future taxation of mergers and acquisitions. 

If you make an asset purchase, the NOLs are not transferred from the target company to the buyer, so they’re not deductible. The opposite is true for a stock purchase. In most mergers and acquisitions, the NOLs are typically lost. 

Implications on State and Local Taxes

When you buy a company along with its locations, customers, and employees, that action can alter your state and local tax liabilities. Because of the complex nature of mergers and acquisitions, turning to a lawyer who specializes in business law is essential to ensure you are handling your taxes correctly after these transactions.

Relying on Experienced Business Law Professionals 

Your business taxes are always complicated, but they can become infinitely more so if you are considering mergers and acquisitions. From how to structure the transaction to how you should handle state and local taxes, having an attorney on your side who has experience with the ins and outs of these tax implications is crucial. 

At Sul Lee Law Firm, we offer assistance in all aspects of business law, providing a tailored approach to your unique circumstances and challenges. Contact our lawyers at Sul Lee Law Firm in Dallas, TX, to speak with a business lawyer.