The growth of an organization through mergers and acquisitions can be an exciting time; however, there are often a significant number of state and local tax considerations that could derail the expected benefits arising from the event. Awareness of potential issues and how they will be handled is critical and should be discussed with the team involved in the acquisition before it becomes a problem.
Whether buying the stock or assets of an existing corporation or merging your business into another business to create operational synergies, each transaction can trigger a state or local tax consequence, the impact of which should not be minimized. Knowing about these issues ahead of time will allow the organization the opportunity to deal with them on a proactive basis and guarantee that the seller is part of the resolution, either through an appropriately drafted indemnification or by structuring the deal differently. Failure to address these issues during the planning period could result in significant liabilities that would need to be dealt with in the future, possibly after the time has passed to seek a remedy from the seller.
Examples of areas that should be examined for potential impact are:
- The expansion of business activity into new states as the result of the acquisition of assets and whether those states impose a tax on net worth and income.
- The creation of a new entity to house the acquired assets could lead to trapped income in high tax jurisdictions. Alternatively, the use of debt to acquire the assets could lead to trapped losses if the company operates in a state that does not permit a combined filing with the other operating entities.
- The creation of intellectual property arising from the acquisition could create unintentional state tax filings if the intellectual property is used to produce a stream of income.
- The survival of tax attributes, such as net operating loss carry forwards, when either merging existing operating entities or acquiring the stock of a target company.
These are just a few of the state tax considerations that should be addressed when contemplating a significant change in the life cycle of a business enterprise. Proactively addressing these issues during the planning stage will minimize any surprises.