Top 10 Tax Code Provisions Every M&A Advisor Should Know

Tax implications can make or break mergers and acquisitions (M&A) deals. For M&A advisors, understanding the nuances of key tax provisions is critical to structuring transactions that benefit all parties involved—buyers, sellers, and stakeholders alike. Whether it’s a matter of reducing liabilities, optimizing cash flow, or avoiding unintended tax consequences, these provisions can play a central role in achieving favorable outcomes. In this article, we’ll explore ten essential tax code provisions that every advisor should know and how they can be leveraged effectively in M&A transactions.

We’ve previously discussed these provisions in detail on the M&A Source Podcast —a two-part series focused on their practical applications. If you haven’t tuned in yet, consider listening for a deeper dive, complete with examples and insights from real-world deals. In this article, we’ll walk through each provision in narrative form to provide context, clarify their benefits, and explain when they come into play.

Section 338: Treating Stock Purchases as Asset Purchases

Section 338 is a tool that allows buyers to treat a stock purchase as if they acquired the business’s underlying assets. This can be a game-changer for buyers because it enables a “step-up” in basis for tax purposes, which means the assets are revalued at their fair market value. From there, the buyer can take advantage of increased depreciation and amortization deductions, reducing future tax liabilities.

However, there’s a trade-off. Sellers may face higher tax burdens because the transaction is treated as an asset sale, triggering ordinary income on certain components of the deal. This dynamic often makes Section 338 a negotiation point during M&A discussions. Timing is also critical—this election must be filed within 8.5 months of closing, so it’s important to plan early in the transaction process.

Section 1202: Qualified Small Business Stock Exclusion

Section 1202 is designed to reward long-term investments in small businesses. For M&A advisors working with C corporations, this provision can be especially powerful. It allows taxpayers to exclude up to 100% of capital gains on the sale of qualified small business stock (QSBS), provided the stock is held for at least five years.

To qualify, the company must operate as a C corporation in an eligible industry and meet specific criteria related to gross assets. Industries such as technology, healthcare, and manufacturing typically qualify, while service-based businesses do not. This provision offers sellers significant tax benefits, and as an advisor, it’s worth exploring whether clients’ transactions meet the requirements.

Section 197: Amortization of Intangibles

Intangible assets are a staple in M&A transactions. Goodwill, trademarks, patents, and franchise rights all fall under Section 197, which governs the amortization of these assets. The provision requires buyers to amortize intangibles over 15 years on a straight-line basis.

For buyers, this provision provides a predictable tax deduction, improving cash flow post-acquisition. However, advisors need to ensure the purchase price is carefully allocated to avoid disputes with tax authorities. Internal goodwill developed by the seller cannot be amortized, so it’s critical to clarify which intangibles qualify under this section.

Section 280G: Golden Parachute Payments

Change-of-control events like mergers often involve large compensation packages for executives. Section 280G imposes a 20% excise tax on “golden parachute payments” that exceed three times the executive’s average compensation over the previous five years.

For advisors, this provision raises two primary concerns: ensuring compliance with the tax code and structuring deals to avoid unintended penalties. Shareholder approval can help mitigate excise taxes, but it’s important to carefully evaluate compensation agreements before a deal closes.

Section 382: Limitation on Net Operating Losses (NOLs)

Net operating losses (NOLs) can be valuable assets in M&A transactions. Section 382 limits the ability to use NOLs after a significant ownership change (defined as more than a 50% shift in ownership). The annual limitation on NOL usage is calculated by multiplying the company’s fair market value by the IRS’s long-term tax-exempt rate.

For buyers looking to offset future income, this provision is a key consideration. As an advisor, you’ll need to assess whether NOLs are a strategic part of the deal and calculate the limitations to ensure they’re usable post-transaction.

Section 368: Tax-Free Reorganizations

Section 368 is all about enabling tax-efficient corporate reorganizations. Whether it’s a merger, acquisition, or another type of restructuring, this provision allows transactions to proceed without triggering immediate taxes—provided certain conditions are met.

The key requirements under Section 368 are continuity of interest and continuity of business enterprise. Continuity of interest means shareholders of the target company must retain a meaningful stake (generally at least 40%) in the acquiring company. Continuity of business enterprise ensures that the acquiring company continues using the target’s assets or operations.

By deferring taxes, Section 368 promotes economic efficiency and business continuity. Advisors must carefully structure transactions to meet these requirements and document them thoroughly to avoid disqualification.

Section 409A: Deferred Compensation

Section 409A governs deferred compensation plans, which are common in M&A transactions involving executives. This provision imposes strict rules on when income can be deferred and when payments can be made. Non-compliance triggers harsh penalties, including immediate taxation, a 20% excise tax, and interest.

For advisors, reviewing deferred compensation plans during due diligence is essential. Triggering events like change of control must be planned for, and payment schedules must align with Section 409A requirements to avoid unintended consequences for both the company and its key employees.

Section 1031: Like-Kind Exchanges

Section 1031 provides a valuable opportunity to defer capital gains taxes on real property exchanges. If a business sells one property and purchases a similar “like-kind” property, capital gains taxes can be deferred, provided strict timelines are followed.

This provision is especially relevant for real estate-heavy businesses. However, it requires careful planning, as sellers must identify replacement properties within 45 days and complete the exchange within 180 days. Advisors should ensure clients work with experienced professionals to avoid disqualification.

Section 721: Contributions to Partnerships

Section 721 facilitates the formation of partnerships by allowing individuals or entities to contribute property in exchange for partnership interests without triggering immediate tax consequences.

The property’s tax basis and holding period carry over to the partnership, creating a tax-neutral environment for joint ventures and resource pooling. However, contributions of encumbered property or disguised sales can complicate matters, so advisors should carefully evaluate contributions for compliance.

Section 453: Installment Sales

For sellers offering flexible financing to buyers, Section 453 allows capital gains taxes to be deferred and spread over the payment period. Instead of paying all taxes in the year of sale, sellers recognize gains proportionally as payments are received.

This provision provides a cash flow advantage for sellers and often makes flexible deal terms more feasible. However, depreciation recapture must still be recognized immediately, and for high-value sales exceeding $5 million, Section 453A imposes an interest charge on deferred tax liabilities.

As an M&A advisor, understanding these ten tax code provisions may empower you (with the help of your professional advisor team) to structure deals that align with your clients’ goals. Whether you’re helping a buyer optimize post-acquisition cash flow through a Section 338 election or guiding a seller on leveraging Section 453 installment sales, these tools can add significant value to your advisory work.

For a deeper exploration of these provisions, check out the two-part M&A Source Podcast series, where each section is broken down with practical examples and downloadable resources. Tax planning in M&A is a team effort—collaborating with tax professionals and legal advisors ensures that your clients reap the full benefits of these strategies.

By mastering these provisions, you’ll be better equipped to navigate the tax complexities of M&A transactions, enabling smarter, more efficient deals for buyers and sellers alike.

by David Dejewski, Transworld Business Advisors of Frederick, Owings Mills, and Columbia