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M&A Tax: Key Considerations for Mergers & Acquisitions in 2025

There is much to consider in M&A dealmaking that extends beyond the transaction itself. New tax legislation and knowing the implications that tax changes may have on your deal will help avoid unexpected obstacles and liabilities that could arise. Below is an overview of potential rule changes and their ramifications to stay on top of when contemplating your next transaction.  

Cloud Computing Sales Tax Claims

As an increasing number of states require sales tax to be collected on cloud computing services, coupled with significant changes resulting from the 2019 Wayfair Supreme Court decision, SRS Acquiom has seen a significant uptick in sales tax-related tax claims. The various service models— software as a service (SaaS), platform as a service (PaaS), and infrastructure as a service (IaaS)—may be subject to sales tax and it is therefore imperative to understand both the specific type of cloud computing service provided and how a particular state may tax such cloud computing service.  

Sellers may be caught off-guard by “nexus” and corresponding tax liability, thinking that they do not have sufficient presence within a state (physical or economic) for tax remittances to apply. Each state separately determines what constitutes “nexus,” or a taxable presence, and sellers must determine their taxability within each state and pay tax appropriately. Not paying the required sales tax may present a tax liability for the seller. 

Among the most impacted industries subject to unforeseen sales tax liabilities are technology and pharmaceutical life sciences. Catching potential tax liabilities early in the due diligence process can help avoid hiccups and fees down the road. Ensuring there is sufficient escrow and expense fund coverage may offset any tax liabilities not identified early in the process. 

Proposed State and Local Tax Changes for 2025 

Currently, the individual tax deduction for state and local income and property taxes is limited to a combined total deduction of $10,000. 

Until the provision expires at the end of 2025 or unless new legislation is passed beforehand, a state level pass-through entity tax may permit a taxpayer to avoid the state and local tax deduction limit. State pass-through entity tax rules are nuanced and can be complicated for businesses that operate across states. 

Federal Tax Proposals 

The research and development (R&D) expensing tax deduction allowed companies of any size to deduct the cost of qualified research expenses from their profits before calculating owed federal taxes. Beginning in 2022, firms that invest in research and development expenditures were no longer allowed to deduct such expenses all at once but rather had to slowly spread out the costs over a five- or fifteen-year period for domestic or foreign R&D, respectively. 

A new proposal is seeking to reinstate the deduction allowance, although the timing regarding when or if it may take effect is uncertain. 

The ABCs of VDAs: Simplifying Compliance 

Voluntary disclosure agreements (VDAs) may be helpful to a selling business as they can reduce the number of historical periods open to tax, and penalties are often abated, resulting in a reduction of pre-closing tax liabilities indemnified by the sellers. Determining whether sales tax liabilities exist and filing the corresponding VDAs early on in a company’s lifecycle may also help deal parties avoid often exorbitant post-acquisition professional fees and additional periods of improper tax remittance. Preparedness now can help you determine the right business course down the road and avoid missteps.  

SRS Acquiom can assist with streamlining companies’ voluntary compliance with tax obligations. 

Contact SRS Acquiom Tax Advisory for more information. 

 

 

Footnote: 
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.  

Seth Rabe

Director, State and Local Tax Advisory tel:646-568-3337

Seth Rabe is a director of State and Local Tax Advisory. He provides guidance to shareholders regarding buyers’ state and local tax claims.

Before joining SRS Acquiom, Seth worked at large multi-national accounting firms and in private practice representing companies. He has over 18 years of experience in all aspects of state and local tax. Seth represented companies in state and local tax disputes, planning, due diligence, and structuring.

Seth received his B.A. from Washington University in St. Louis, his law degree from Cardozo School of Law at Yeshiva University, and an LL.M. in Taxation from the University of Miami School of Law.

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