Maximizing Value through M&A Tax Considerations

Maximizing Value through M&A Tax Considerations

A comprehensive approach to the tax implications of a merger or acquisition is an essential yet often overlooked component of an efficient and fruitful exit strategy. The downstream implications of proper—or poor—tax planning can be felt throughout the lifetime of a merger and acquisitions (M&A) transaction. The intangible benefits of strategic M&A tax planning often include faster go-to-market timing, streamlined deal and entity structure agreements, reduced frequency of unforeseen complications, and avoidance of pre-closing legal and regulatory issues. Combined, these factors help to deliver maximum value to both buyers and sellers, supporting a smooth transaction process and profit maximization through efficient management of capital gains, tax mitigation for all parties, and avoidance of post-close legal and regulatory issues.

The Role of Tax Planning in the M&A Process

Optimal tax preparation begins 12–24 months prior to the initiation of an M&A process to allow ample time to consider necessary structural shifts and prepare for contingencies. Early and thorough identification and analysis of key tax-related factors—such as preferred deal or entity structure—may provide business owners enough breathing room to pursue operational optimization through sell-side readiness services. Furthermore, owners may find alternate avenues, such as conversion to an employee stock ownership plan (ESOP), that are more favorable or identify necessary business changes that may influence the taxable events of succession.

Proper Tax Preparation Sets Stage for an Efficient M&A Process

Four Key M&A Tax Considerations

There are four fundamental components of entity and deal structure that business owners should focus on for M&A tax planning. By weighing available options, business owners can successfully capitalize on these benefits and maximize after-tax proceeds.

Four Key M&A Tax Considerations for Business Owners

#1. Business Structure

The structure of a target entity can influence the tax implications of a change in ownership, presenting an opportunity to optimize business structure prior to a sale. Strategic restructuring can allow business owners to mitigate their tax burden when selling their company. Meanwhile, buyers may favor one entity structure over another, introducing an important element of negotiation. In order for both parties to prepare for these talks and optimize deal outcome, careful and early consideration of preferred entity structure should serve as the first step of pre-sale tax planning. There are three basic entity structures that introduce distinct tax implications during an M&A transaction:

1. A C Corporation (C Corp) is the default Internal Revenue Service (IRS) corporation structure, allowing the business itself to own property, establish contractual agreements, conduct legal action, and pay taxes separate from its owner(s).

• M&A Tax Considerations for C Corps: An asset-based deal may be less favorable for a C Corp seller, as distributions would be doubly taxed at the entity and shareholder level upon transaction close; however, eligibility for qualified small business stock (QSBS) benefits may make C Corp classification more palatable for sellers. Buyers oftentimes prefer asset-based deals due to advantageous deduction opportunities and isolation of liabilities, creating a point of negotiation for C Corp transactions.

2. An S Corporation (S Corp) is an elected special tax status under IRS regulations that offers certain tax advantages. In order to convert to S Corp status, corporations must be domiciled in the U.S., consist solely of allowable shareholders (U.S. citizens and residents as well as certain trusts, estates, and tax-exempt organizations), have 100 or less shareholders, offer a singular class of stock, and not be an ineligible entity (e.g., financial institutions, insurance companies, international sales corporations).

• M&A Tax Considerations for S Corps: S Corp business owners generally prefer stock-based transactions, as they receive just one level of taxation upon transaction close. Buyers may seek to avoid acquisitions of S Corps due to their strict ownership, headcount, and entity structure eligibility requirements.

3. A Partnership is a general business structure that offers owners pass-through taxation status. Varying levels of liability can be assumed by owners and partners based on the specific type of legal entity set up. A General Partnership (GP) distributes equal liability among partners, while a Limited Partnership (LP) places unlimited liability upon one or more general partners while limited partners have their liability capped at the amount of capital invested. While a limited liability company (LLC) with two or more members is generally treated from a tax perspective as a partnership by default, an LLC can elect to be taxed as either a C-Corp or an S-Corp.

• M&A Tax Considerations for Partnerships: Partnerships may engage in a Section 754 election to adjust the cost basis of their assets to fair market value (FMV), providing tax benefits to buyers.¹ Depending upon tax treatment of the partnership, sellers may face additional self-employment taxes upon deal closing.

#2. Line of Business

The type of product or service offered by a target company may introduce potential tax mitigation opportunities, as well as complicate tax distribution. Identifying the unique tax implications of a specific business can help prepare for post-close tax burdens and reduce unforeseen costs. Target companies can be generally classified into three types of offering categories:

1. Software developers, particularly subscription-based or Software-as-a-Service (SaaS) businesses, may be able to take advantage of amortization options when dealing with deferred revenues, while also capitalizing on the treatment of software development costs as research and experimentation (R&E) deductions.
2. Service providers, such as those classified as specified service trades or businesses (SSTBs), may face limitations or ineligibility for certain tax deductions—including Section 1202 and Section 199A—depending on ownership, structure, and income thresholds.^2,3
3. Goods-based sellers, especially those with international supply chain exposure, may face import- and export-related tax implications including complications regarding which party owns in-transit stock versus existing inventory and which regional authority demands tax payment.

#3. Deal Structure

Identifying preferred deal structure and preparing for negotiations with potential buyers can aid in streamlining the transaction process. Traditional M&A deals can be classified into two primary structures:

1. An asset-based deal isolates specific assets such as intellectual property (IP), real estate, and equipment from unwanted liabilities.

• Asset-Based M&A Tax Considerations: This approach is often preferred by buyers as it offers opportunities for a step-up in tax basis (a reset of an asset’s cost basis to FMV) and increased opportunities for additional deductions. For sellers, this transaction structure typically results in double taxation or ordinary income tax treatment for a portion of deal consideration, though certain benefits may be found through retention of the legal entity and other isolated assets.

2. Stock-based deals treat the target entity as a whole, with buyers assuming the totality of the company’s assets and liabilities as part of the transfer in equity ownership. This is generally true across both majority and minority stake deals.

• Stock-Based M&A Tax Considerations: This deal structure may be preferred by sellers as it can offer a singular, flat tax for the seller at the capital gains rate. For buyers, stock-based transactions may force buyers to conduct additional diligence and negotiate specific indemnifications for unwanted liabilities that would transfer to the acquirer.

#4. Buyer Type

While buyer type does not dictate any specific tax treatment from a legislative or regulatory standpoint, certain buyers may be able to leverage their resources or tax codes to their unique advantage, therefore influencing deal structure. M&A buyers can be classified into two common buyer types:

1. Strategic buyers are industry participants that utilize inorganic growth to strengthen their competitive positioning through market share capture and service line expansion.

• M&A Tax Considerations for Strategic Buyers: This type of buyer may offer tax-deferred stock-for-stock deals and is more likely to assume liabilities.

2. Financial buyers are investment companies such as private equity (PE) firms, hedge funds, and family offices that engage in M&A to deliver return on investment (ROI) to their partners.

• M&A Tax Considerations for Financial Buyers: This buyer type typically requires sellers to roll over equity, and sellers receive tax-deferred treatment on this form of deal consideration. Financial buyers frequently—but not always—utilize Section 368(a)(1)(F) reorganizations to convert S Corps into disregarded entities, offering buyers a step-up in tax basis to FMV in addition to deferment of taxes.⁴ An F reorganization imposes no limit on how much or how little a seller must roll over to receive tax-deferred treatment—unlike a Section 338(h)(10)⁵ election, which maintains an 80% threshold.

Bringing Clarity to M&A Tax Considerations

Business owners are often faced with competing priorities, from planning strategy to managing daily operations, and staying current on the intricacies of the U.S. tax code often falls low on the list of priorities. However, the tax code plays a significant role in middle market exit planning. Legislative developments—most notably the passing of the One Big Beautiful Bill Act (OBBBA) in July 2025—have introduced fundamental shifts to how depreciation, interest, and expensing influence the M&A process. Shortly after the bill was passed, Capstone’s proprietary research found that these legislative changes had introduced additional uncertainty for middle market business owners planning an exit, highlighting the struggle to maintain an up-to-date understanding of U.S. tax code. Of note, 41.4% of middle market business owners viewed the OBBBA as having an unclear effect on company operations, according to Capstone’s 2025 Middle Market Business Owners Survey. Moreover, 36.7% of CEOs expected the bill to introduce negative consequences for their businesses. Tax implications are clearly top-of-mind for business performance, yet many owners struggle to keep pace with the changes most relevant to their companies during a change in ownership. Just as investment banks like Capstone deliver M&A advisory services, tax professionals provide guidance to business owners, delivering optimal outcomes through efficient tax management.

Capstone Speaks with Legal Professionals at Nixon Peabody on Key M&A Tax Considerations

In February 2026 Capstone spoke with the specialists at law firm Nixon Peabody to explore insights into the OBBBA, optimal tax consideration timing, the effects of business and deal structure, and more. Headquartered in Boston, Nixon Peabody has been a leader in transaction tax advice since 1999, with its roots going back to the late 19^th century. With 650+ professionals and 15 locations across the U.S., Europe, and Asia, the firm delivers a unique level of knowledge and engagement to its clients. Nixon’s Corporate & Finance business unit provides advisory services on M&A, capital markets, PE, and governance.

At what point in exit planning should owners start to strategize around the type of deal they wish to pursue? Sellers should start planning 12–24 months before exit. Evaluate entity structure, basis adjustment needs, and buyer preferences well ahead of the letter of intent (LOI) phase. Asset sales are typically more mechanically cumbersome than stock sales, as assignments of third-party contracts, licensure, permitting, and title to assets become part of deal execution.

How should business owners prepare for an asset-based deal versus a stock-based deal? Focusing on tax considerations, buyers generally prefer an asset-based deal because this affords the buyer a step-up in tax basis—and thus, higher depreciation deductions and expensing—while sellers generally prefer a stock deal since it results in one level of tax (at the shareholder level) at the capital gains tax rate—20% plus 3.8%. Business owners should anticipate this tension and consider whether pre-sale transactions might reduce the tax cost. Typically, owners will explore whether they qualify for “deemed-asset sale” provisions of the Internal Revenue Code Section 338(h)(10)⁵ or 336(e).⁶ There may be reasons why a seller is indifferent to an asset deal, such as net operating losses (NOL), high tax basis in assets, or general tax-indifferent or tax-exempt status. Asset sales require the allocation of purchase price across asset classes—inventory, equipment, goodwill—which may present tension as sellers may face ordinary income—depreciation recapture on fixed assets—and capital gains to a greater or lesser degree based on the allocation.

What are the tax implications stemming from the type of company being sold (e.g., LLC, C Corp, S Corp)? For C Corp asset sales, sellers are taxed at the corporate level plus shareholders taxed on distribution—dividend—resulting in a “double tax.” For stock sales, sellers get one level of tax at the capital gains rate. Buyers assume the liabilities. When planning, consider conversion to an S Corp or implementing personal goodwill planning to mitigate double taxation. Consider whether the C Corp is a qualified small business and eligible for QSBS benefits under Section 1202. The existence of NOLs may allow for an asset sale, as discussed earlier. For S Corps, an asset sale triggers depreciation recapture, with gains taxed once at shareholder level. Stock-equivalent sale of membership and interests qualifies for capital gains, with preserved basis carryover. Electing S classification via Form 2553.⁷ influences sale structure and eligibility. LLCs are treated as flow-through. An asset sale allocates price among assets and offers sale-structure flexibility. Consideration must be given to a Section 754 election if purchase price would allow the buyer a step-up in the inside tax basis in the assets. Stock-equivalent sales reflect member interests, taxed at capital gains rates.

Are there cases where a seller should consider altering their business structure to maximize tax incentives? The most typical pre-sale tax planning relates to attempting to qualify for QSBS benefits under Section 1202 by converting to a C Corp and meeting the requirements, or spin-off transactions or asset sales to segregate assets that are not wanted by the buyer or want to be preserved by the seller. Because a stock sale could trigger the Section 382 limitations on NOLs, consideration should be given to doing an asset sale, or alternatively evaluating the Section 382 limitation rules to see how onerous they may be and whether certain exceptions, like the bankruptcy exceptions under Section 382(I)(5) or (I)(6) might apply, as well as understanding the net unrealized built-in gain or loss.⁸

What are the M&A implications of the OBBBA?

• Bonus depreciation: Immediately expensing qualifying capital asset post-acquisition is beneficial in asset deals but may increase recapture for sellers.
• Qualified Small Business Stock S(§1202): Exclusion cap rose from $10 million to $15 million (10x basis cap remains unchanged), with tiered holding period (three years at 50%, four years at 75%, and five years at 100%). Prior law required a five-year holding period. The eligibility cap was increased from $50 million to $75 million, so more companies will qualify.
• 199A Qualified Business Income (QBI) Deduction: Permanently extended; benefits seller of pass-through entities.
• Research & development (R&D) expenses: Domestic R&D can be currently deductible.
• Interest limitation: Increased cap on the ability to take interest deductions—Section 163(j)—which helps leveraged buyers.⁹

Does a sale to a public strategic acquirer, private strategic buyer, or PE firm introduce any tax implications for the business owner of the target company? Strategic buyers may offer stock-for-stock deals and reorganizations that allow tax-deferral to sellers—in some cases with as little as approximately 40% of historic shareholders remaining. Strategics are more likely to assume liabilities. PE buyers predominantly structure deals as taxable asset or equity purchases. These buyers can sometimes offer rollover equity structures and incentive adjustments. Section 1202 is still available if applicable. Section 368(a)(1)(F) reorganizations—”F reorgs”—are frequently used to convert an S Corp target into a disregarded entity to achieve a step-up in tax basis for the buyer. This is particularly helpful if the rigid requirements of Section 338(h)(10) and 336(e) cannot be satisfied. For example, if the buyer is not a corporation—Section 338(h)(10)—or the seller is not selling at least 80% of the voting power and value of the target. Public acquiring companies may roll stock; the valuation impacts mitigate immediate tax exposure. Private strategics tend toward cash-plus-equity and asset-step-up strategies.

What are the tax implications of the target company’s offering type, and how should owners prepare to address the unique tax implications of their respective business type?

• Software: Consider amortization of deferred revenue, capitalization of development costs—Section 174—and software-as-a-service (SaaS) characterization for indirect tax and value-added tax (VAT).¹⁰
• Services: Income is generally recognized under Section 451 and Accounting Services Codification (ACS) 606.^11,12 SaaS targets often have substantial deferred revenue. Foreign buyers have a higher risk of effectively connected income (ECI) arising from the activities of the target and thus a U.S. blocker corporation should be considered.
• Goods: Export and import implications, and sales/use tax and inventory. Tariffs have become more prevalent.

For goods-focused companies, how is existing inventory and/or inventory in transit treated from a tax perspective? With in-transit inventory, title transfer terms dictate responsibility. If it is at the Free on Board (FOB) shipping point, the buyer owns it in transit. If at the FOB destination, the seller owns it until the inventory is delivered. It must be allocated properly to avoid misstatements and unanticipated state nexus.

How should business owners efficiently manage the transition of equity during the succession process from a tax mitigation perspective? Buy-sell agreements are popular both for succession planning reasons as well as to preserve tax status—for example, not allowing an ineligible owner to get S Corp stock. Caution should be used to make sure the method of valuing the entity aligns with goals. See Connelly v. U.S., 602 U.S. 257.¹³ Installment sales with seller financing may spread capital gain over several years. Rollovers into buyer equity provide deferred gain to the seller and operational alignment. ESOPs, trusts, or family gifting may shift interest while using gift and estate exemptions. Overlooking Section 382 limits on NOLs after ownership change is a pitfall to watch for. Poor purchase price allocation can reduce depreciation and increase seller tax. State and local tax (SALT) and nexus ignored until deal structuring leads to claims post-deal. The seller may have personal liability for withholding taxes or other trust fund taxes such as state and local sales taxes or federal and state payroll taxes.

Is there anything else you would like to add with respect to important tax considerations during the M&A process?

1. Tax due diligence: Essential to uncover liabilities such as unpaid SALT, sales taxes, payroll taxes, and nexus issues relating to remote workers, exposure from transfer pricing, and Employee Retention Credit (ERC).¹⁴ The statute of limitations may be until 2030 and beyond.
2. Purchase price allocation: Must reflect fair market value. This affects both buyer depreciation and seller capital gains timing and rates.
3. Tax-free reorganizations (Section 368): If the seller and/or buyer agrees to a reorganization, the transaction must meet continuity of interest and business purpose requirements.
4. International transactions: For multi-jurisdiction targets, validate transfer-pricing compliance to avoid adjustments and compliance with other international tax provisions. Consider the income tax treaty network when structuring international M&A transactions, and consider tariffs.

Identifying Where Your Company is in the Process

Business owners may be left wondering where to start. The earlier the better is the optimal approach when considering the tax implications of a future M&A transaction. Wherever an owner may be in the exit planning process, they should consider the four key factors to guide their tax planning strategy: business structure, offering type, deal structure, and buyer type.

Investment banks such as Capstone serve as critical partners throughout the M&A lifecycle, helping business owners maximize the value and profitability of a deal, accelerate the speed-to-close, and ensure efficient achievement of succession plans. Through partnerships with tax and legal professionals, Capstone delivers a fully integrated deal team that provides specialized guidance at every stage of a transaction. Advisory services often deliver outsized value to transactions by reducing execution risk and tax inefficiency, enabling business owners to focus on what matters most—driving the continued success of their enterprise.

Capstone Partners offers a full suite of corporate finance solutions to help business owners achieve their goals. If you are considering a transaction to support the goals of your company and would like professional transaction guidance to help meet those goals, please contact us.

Brendan Bradley, Associate, was the lead Market Intelligence contributor to this article.

Glossary of Tax Codes

1. 26 U.S. Code § 754: allows partnerships to adjust the tax basis of their assets after a distribution of property or transfer of interest, avoiding double taxation.
2. 26 U.S. Code § 1202: allows for partial federal income tax exclusion of capital gains generated from the sale of qualified small business stock (QSBS).
3. 26 U.S. Code § 199A: allows for eligible taxpayers (e.g., sole proprietors, S Corps, and certain trusts) to deduct up to 20% of qualified business income (QBI) from federal income tax.
4. 26 U.S. Code § 368(a)(1)(F): allows a business to restructure (e.g., change of incorporation location, adjustment of entity structure) without triggering taxable gains or losses.
5. 26 U.S. Code § 338(h)(10): allows for a stock acquisition to be treated as an asset acquisition for tax purposes.
6. 26 U.S. Code § 336(e): allows for a corporation to treat a distribution of at least 80% of a subsidiary’s stock as an asset sale for tax purposes.
7. Form 2553: IRS form used to elect S Corp status.
8. 26 U.S. Code § 382: limits the ability to use net operating loss carryforwards and built-in losses after a change in ownership.
9. 26 U.S. Code § 163: allows business owners to deduct business interest expenses of up to 30% of adjusted taxable income from federal income tax.
10. 26 U.S. Code § 174: dictates the amortization schedule of both domestic and foreign research and experimental expenditures.
11. 26 U.S. Code § 451: governs the recognition of income as included in the taxable year in which it was received, with exceptions based on accounting method.
12. Accounting Services Codification (ASC) 606: establishes a five-step model for revenue recognition (identification of contract; identification of obligations; determination of price; allocation of transaction price to obligations; recognition of revenue).
13. Connelly v. U.S., 602 U.S. 257: landmark case heard by the Supreme Court in 2024 in which the court ruled that the use of proceeds from a corporation-owned life insurance policy on a shareholder to buy back the decedent’s must be treated as a company asset, and thus increased the organization’s FMV; the decision introduced changes to succession and estate planning.
14. Employee Retention Credit: pandemic-era tax credit that allowed certain businesses and organizations to benefit from taxable income deductions for retaining employees; while acceptance of new claims closed in April 2025, the existing backlog of claims has continued into 2026.