Utilizing Tax Attributes in Acquisitions: Leveraging NOLs and Credits for Your M&A

In the mergers and acquisitions (M&A) world, savvy investors and business owners look beyond the immediate financials to identify underlying value. One often overlooked aspect is the strategic utilization of tax attributes such as Net Operating Losses (NOLs) and tax credits.?

These attributes can significantly impact post-acquisition profitability and tax efficiency. Understanding how to leverage these can be a game-changer in negotiations and the overall success of a transaction.

The Value of NOLs and Tax Credits

NOLs are tax deductions when a company's allowable tax-deductible expenses exceed its taxable revenues. These losses can be carried forward to offset future taxable income, thus reducing future tax liabilities. Similarly, tax credits can be used to reduce the amount of tax owed directly. When properly leveraged in an M&A context, both NOLs and tax credits can enhance a deal's attractiveness.

Key Considerations for Acquirers

• NOL Carryforward and Carryback Limitations: It's crucial to understand the limitations imposed on the carryforward and carryback of NOLs, especially in light of changes enacted by recent tax laws. For example, while NOLs can typically be carried forward indefinitely, their utilization in any given year may be capped at 80% of taxable income.
• Section 382 Limitations: The IRS imposes limits under Section 382 on the amount of taxable income NOLs can offset after an ownership change. These limitations, which hinge on the company's fair market value and the long-term tax-exempt rate, require careful analysis.
• Tax Credits: Similar to NOLs, tax credits can carry substantial value. However, their transferability and the specific rules governing their use post-acquisition vary significantly between different types of credits.

Strategic Acquisition Planning

• Due Diligence: Conduct thorough due diligence to identify and quantify the target's available tax attributes. This includes NOLs, tax credits, and other attributes like capital loss carryforwards and credit carryforwards.
• Valuation and Negotiation: Consider the value of tax attributes in the overall valuation of the target. This can also be a significant negotiation point, particularly if the acquirer can utilize the attributes immediately or has a clear path to doing so.
• Structuring the Deal: The structure of the M&A transaction can significantly impact the usability of tax attributes. For example, in a stock sale, the buyer generally inherits the target's tax attributes. However, specific provisions like Section 338(h)(10) elections can allow buyers to treat stock purchases as asset acquisitions for tax purposes, potentially offering a step-up basis while preserving the target's tax attributes.

Case in Point

Consider a scenario where an acquiring company can immediately utilize the NOLs of a target company due to complementary taxable income streams. The acquisition is structured as a stock sale to ensure the NOLs transfer with the business. However, careful planning and a detailed Section 382 analysis are required to maximize the NOLs' value post-transaction, ensuring compliance with IRS limitations.

My Two Cents

The strategic use of NOLs and tax credits in M&A transactions requires careful planning, a deep understanding of tax laws, and thoughtful deal structuring. These tax attributes can add significant value to a deal, offering opportunities for tax savings and enhanced cash flow post-acquisition. Engaging with tax professionals early in the deal process is crucial to navigating the complexities and unlocking the full potential of these valuable assets.

For guidance on leveraging tax attributes in your next acquisition, reach out to discuss how we can optimize your transaction's tax impact.

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Navigating taxes in M&A is not just about understanding the numbers; it's about understanding the movement of the market and being ready to pivot your strategies accordingly.

Your success in a changing economy depends on it.