M&A Planning: Will the Intangibles Be Tax Deductible?

• July 28, 2019
• Amanda Garnett

With transaction premiums increasing and the merger and acquisition market remaining strong in many parts of the country, one of the questions we often get asked by potential buyers is whether or not the intangibles they are recording will be tax deductible.  Tax basis goodwill and other intangibles can be tax deductible over fifteen years in some cases, but it depends on how the transaction is structured. 

Determining whether your transaction will be structured as a stock transaction or an asset transaction is an important early step in any M&A negotiation. 

Stock Transaction

In an acquisition structured as stock transaction, the buyer steps into the shoes of the seller from a tax perspective.  The tax basis in all of the seller’s assets carries over from the seller to the buyer.  There is no step up in the basis of the assets for tax purposes even though purchase accounting adjustments are made for book purposes. 

This can be advantageous to the seller, but for a buyer there can be some significant disadvantages including:

• For fixed assets, all tax lives and methods continue from the previous owner.
• New intangibles recorded are not tax deductible.
• Related deferred tax liabilities may need to be recorded on Day 1 as part of purchase accounting.

Asset Transaction

An asset acquisition can be executed in a variety of ways but typically both the buyer and the seller must consent for a transaction to be structured in this manner. 

On its final tax return, the seller must report tax gains and losses from the sale of all of the entity’s assets, which can result in a significant tax liability.  However if the seller is an S Corporation, structuring the transaction as an asset acquisition can be an attractive option with little net downside for the seller depending on the assets being acquired.  Sellers with net operating loss carryforwards may also be amicable to an asset transaction.  For other types of targets, asset transactions may require more negotiation.    

For buyers, asset transactions offer considerable advantages.  Buyers receive stepped up tax basis in all of the assets they acquire as part of the transaction and other advantages may include:

• The ability to start fresh with depreciation on buildings and equipment including an opportunity to take bonus depreciation or Section 179.
• Goodwill and other intangibles calculated on a tax basis that is deductible on a straight-line basis over 15 years

Next Steps

The best tax structure for any acquisition depends on the unique facts and circumstances impacting the institutions involved.  Tax considerations for mergers and acquisitions are very complex and there are many tax, legal, regulatory, and operational considerations beyond those listed here.  But, potential buyers and sellers should be aware of the basic differences between stock and asset transactions and should carefully consider them during the negotiation process.

CLA is here to assist you all throughout the merger and acquisition process.  Please contact us.  

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