September 6, 2022
M&A Tax: New Book Minimum Tax Creates Complications for M&A
It turns out that the 1% excise tax on buybacks isn’t the only provision of the Inflation Reduction Act that complicates things for dealmakers. This Wachtell memo discusses how the new “Book Minimum Tax” provisions – which impose a 15% minimum tax on corporations’ with “adjusted financial statement income” exceeding $1 billion over the preceding three years – may impact M&A transactions. This excerpt addresses the BMT’s implications for taxable asset purchases:
For income tax purposes, an acquisition structured as a taxable asset purchase (or deemed asset purchase by reason of a Section 338 election) typically results in a “step up” in the tax basis of the acquired assets, including goodwill, which is depreciable by the buyer. In contrast, an acquisition structured as a tax-free “reorganization” or as a taxable stock purchase does not result in a step up in the tax basis of the target’s assets.
Under U.S. GAAP, purchase accounting would result in the target’s assets being reflected at fair value regardless of the tax treatment of the acquisition. Because goodwill is not amortized under current U.S. GAAP, a taxable asset purchase (or deemed asset purchase) could give rise to adjusted financial statement income of the buyer that significantly exceeds its taxable income. In such a case, the BMT could reduce or eliminate the buyer tax benefits typically associated with a taxable asset purchase.
The memo also discusses the BMT’s implications for corporate divisions, such as spin-offs and split-offs, and notes that it may affect other situations in which income tax and GAAP treatment have diverged, including potential differences in the treatment and utilization of target NOLs and the treatment of deal-related expenses.
– John Jenkins