May 29, 2025
Introduction
Mergers and acquisitions (M&A) are vital pathways for companies seeking growth, market penetration, and strategic repositioning. However, beyond the headlines these deals generate lies a myriad of complex legal, financial, and tax issues. Of these, tax structuring is especially crucial to determine whether a transaction achieves its intended value or becomes mired in unintended liabilities and inefficiencies.
From a tax standpoint, an M&A transaction’s structure can significantly affect buyers and sellers alike—impacting how much tax is paid, when it is paid, and by whom. This is true for both large-cap corporations and middle-market companies. While each deal is unique, some foundational structures and elections are common across transactions. It is essential that business owners, investors, and advisors understand these structures to successfully complete deals and maximize their organization’s financial health.
Asset and Stock Acquisitions
At the highest level, M&A transactions are categorized into two fundamental types: asset acquisitions and stock acquisitions. Each approach has distinct tax consequences and business implications.
Asset Deals
Asset acquisitions involve buyers purchasing specific assets, and they often assuming certain liabilities of the target company. These are generally favorable to buyers, as it allows them to obtain a stepped-up basis in the acquired assets. This means that the buyer’s tax basis in the assets is equal to their purchase price, enabling enhanced depreciation and amortization deductions in future years. Because the buyer can select which liabilities to assume, asset deals offer a level of protection against undisclosed or contingent liabilities.
However, asset deals can be less attractive to sellers, particularly when the target is a C corporation. In this scenario, the company must pay corporate tax on any gain from the asset sale, and the shareholders face a second layer of tax when the proceeds are distributed, resulting in double taxation. S corporations or partnerships typically face only a single level of tax when selling, making asset sales less punitive.
Stock Deals
A stock acquisition involves the buyer purchasing target company shares directly from its shareholders. Stock sales are usually more tax-efficient for sellers as they typically result in capital gain treatment, which is often taxed at favorable long-term capital gains rates. Stock deals are simpler to execute as the target company continues to hold its assets and liabilities; there’s no need for complex retitling of assets or renegotiation of contracts tied to asset ownership. To learn more about capital gains treatments in M&A transactions, click here.
Stock deals can come with downsides for buyers, including the lack of a stepped-up basis in the underlying assets. The buyer inherits the target company’s existing tax basis in its assets, which can limit future depreciation and amortization deductions. Also, the buyer assumes all historical liabilities, tax-related and otherwise.
Bridging the Gap: Tax Elections and Structures That Combine Benefits
Because buyers and sellers often have opposing preferences—buyers usually favor asset deals, while sellers prefer stock deals—the Internal Revenue Code provides different elections designed to bridge this gap. These elections allow a transaction to be treated as an asset sale for tax purposes, even though it is legally structured as a stock sale.
Section 338(h)(10)
Section 338(h)(10) is a well-known election available in transactions where the buyer acquires the stock of an S corporation or a subsidiary of a consolidated group. If both the buyer and seller agree, the deal can be treated as if the target company sold all its assets and then liquidated—however, only the stock changed hands. This allows the buyer to enjoy the tax benefits of a stepped-up asset basis while still retaining the legal simplicity of a stock transaction. Note, this election can trigger tax for the seller at both the corporate and shareholder levels, similar to an actual asset sale.
F-reorganization
In an F-reorganization, the seller restructures its operations prior to the sale through a series of transactions. As a result, the target now owns a single-member LLC that holds all of the target’s operating assets. After the restructuring, the target sells the units of the LLC to the buyer in a transaction that is treated as an asset sale. While this transaction is a bit more complex, it will eliminate some tax risks to the buyer, simplify the post-acquisition structure, and provide flexibility to accommodate acquisitions of less than 100% of the target.
Special Considerations for Pass-Through Entities
Many middle-market businesses are organized as partnerships or LLCs taxed as partnerships. For these entities, the tax dynamics of an M&A deal differ from those of corporations. When someone buys a share in a partnership, they take over the seller’s role and get a share of the partnership, not its individual assets.
However, buyers may seek to obtain a step-up in the basis of the partnership’s assets, replicating the benefits of an asset acquisition. This is achieved through a Section 754 election. If in place (or if newly elected in connection with the transaction), this election allows the partnership to adjust the inside basis of its assets to reflect the purchase price paid for the interest. This adjustment applies only to the buyer’s share of the assets, enabling them to take higher depreciation and amortization deductions.
Such structures are especially valuable in industries with significant tangible or depreciable assets, such as real estate or manufacturing, where the tax benefits of a stepped-up basis can be substantial.
Triangular Mergers: Flexibility in Complex Deals
Triangular mergers are often used to facilitate tax and legal efficiencies, and they can be structured as either forward triangular mergers or reverse triangular mergers.
Forward Triangular Mergers
In a forward triangular merger, the target company merges into a subsidiary of the buyer, with the subsidiary surviving. For tax purposes, this is generally treated as an asset acquisition, allowing the buyer to benefit from a stepped-up basis in the target’s assets, assuming requirements are met.
Reverse Triangular Mergers
In a reverse triangular merger, the buyer’s subsidiary merges into the target company, with the target surviving as a subsidiary of the buyer. This structure retains the target’s existing corporate identity, making it advantageous when the target has valuable contracts, licenses, or regulatory approvals that are difficult to transfer. For tax purposes, a reverse triangular merger is usually treated as a stock acquisition, meaning the buyer inherits the target’s existing basis in its assets.
Structuring Decision Factors
Choosing the optimal tax structure for an M&A transaction involves evaluating several factors, including whether the buyer seeks a stepped-up basis in the target’s assets—a benefit that significantly impacts future cash flow through increased depreciation and amortization deductions. Another is the seller’s desire for capital gain treatment, which can make stock deals more attractive for sellers.
Other considerations include the presence of valuable tax attributes (such as net operating losses or tax credits) that the buyer wants to preserve, the extent of potential historical liabilities, and the complexity or cost of transferring individual assets, particularly in regulated industries. Legal simplicity and the ability to maintain business continuity, such as retaining licenses or customer contracts, often also play a role in favoring stock deals over asset acquisitions.
Conclusion
The tax structure of an M&A transaction is not merely a technical detail—it is a fundamental driver of deal value and risk allocation. Whether a transaction is structured as an asset deal, a stock deal, or a hybrid using special tax elections, each path carries distinct tax consequences that affect buyers and sellers well beyond the closing date.
Understanding these basic structures allows organizations to make informed decisions, negotiate effectively, and avoid costly surprises. In an M&A landscape characterized by increasing regulatory scrutiny and complex tax rules, early and thorough planning, supported by experienced tax advisors, is essential to ensure that transactions achieve their intended strategic and financial goals.
For questions and to learn more about structuring for mergers and acquisitions, connect with us.
© Clark Nuber P.S., 2025. All rights reserved.
