When you are planning for a business sale tax due diligence might seem like a last-minute thought. However the results of tax due diligence can be crucial to the success of any transaction.
A thorough study of tax laws and regulations can help identify potential issues that could cause a deal to fail before they become a major issue. They could range from the fundamental complexity of a company’s tax situation to the specifics of international compliance.
Tax due diligence can also determine whether a company can create taxable presence abroad. For example, an office in a different country can trigger local country taxation on income and excise however, despite the fact that an agreement between the US and the foreign country could mitigate the impact, it’s crucial to recognize the tax risk and opportunities.
As part of the tax due diligence process we look at the prospective transaction as well as the company’s previous acquisition and disposition activities and review the company’s transfer pricing documentation and any international compliance issues (including FBAR filings). This includes assessing the assets and liabilities’ tax basis and identifying tax attributes that could be used to increase the value.
For instance, a company’s taxes deductions may exceed its tax-deductible income, leading to net operating losses (NOLs). Due diligence can help determine if these NOLs can be recouped and whether they could be transferred to the new owner as a carryforward or used to reduce tax burdens following the sale. Other tax due diligence items include unclaimed property compliance which, while not a tax issue is becoming a subject of increasing scrutiny by state tax authorities.