What finance teams should know before a transaction

The tax outcome of a sale, merger, or investment is shaped mostly by decisions made before the letter of intent is signed. Once the structure is agreed, there is little room to change it. Finance teams that understand the main issues early are in a better position to protect value.

Asset sale or stock sale

Buyers generally prefer to buy assets, because they receive a stepped-up tax basis that produces future depreciation and amortization. Sellers of C corporations generally prefer to sell stock, because an asset sale can be taxed twice, once at the corporate level and again when proceeds are distributed. Elections under Section 338(h)(10) or 336(e), or an F reorganization for S corporations, can give a buyer asset treatment while the seller still sells its shares. Each has eligibility requirements and consequences that should be modeled on both sides.

Tax attributes

Net operating losses, credit carryforwards, and tax basis can carry real value, but they are often limited after a deal. Section 382 limits the annual use of losses after an ownership change of more than 50 percentage points over three years, and Section 383 applies similar limits to credits. Buyers will price these limits, so sellers should understand them first.

QSBS

Shareholders of a C corporation may be able to exclude gain on qualified small business stock under Section 1202. For stock issued after July 4, 2025, the exclusion is 50% after three years, 75% after four, and 100% after five, with a per-issuer cap of $15 million or 10 times basis, and a $75 million gross asset limit at issuance. Deal structure affects whether the exclusion survives, so it belongs in the earliest discussions.

Transaction costs and timing

Legal, banking, and diligence costs that facilitate a transaction are generally capitalized rather than deducted. For success-based fees, a safe harbor allows 70% to be deducted if the taxpayer makes an election with the return. Earnouts, escrows, and rollover equity each affect when gain is recognized, and the installment method may spread the tax over several years.

Diligence starts with your own records

A buyer will review federal and state returns, payroll tax compliance, and sales tax collection. Missing state returns and uncollected sales tax are among the most common findings, and they often lead to escrows or price reductions. Reviewing these areas before going to market gives the company time to fix issues on its own terms.

Vallou helps companies prepare for transactions by modeling structure options, reviewing tax exposure before diligence, and working with deal counsel on the tax provisions of the agreement.