25 Apr 2023 M&A Considerations Resulting From The New Required Tax Treatment of R&D Costs
The Tax Cuts and Jobs Act of 2017 changed the required tax treatment of research and development expenses, creating new costs and tax liabilities for buyers when considering mergers and acquisitions. This is particularly relevant in certain industries such as life sciences, technology, and manufacturing. It is important for buyers to understand the implications of this change on their target’s tax posture, as well as how it affects purchase agreement negotiations and tax projections.
Depending on how a transaction is structured, buyers should consider various factors when evaluating their target’s tax treatment of R&D under section 174. They should assess activities that give rise to capitalizable costs, if accounting method changes have been made, and how the capitalization affects the target’s overall tax posture. Furthermore, the utilization of net operating losses (NOLs) and other tax attributes should be scrutinized, and any pre-closing tax liabilities should be addressed in the purchase agreement. Additionally, any potential opportunities or risks related to the R&D tax credit should be evaluated.
Ultimately, understanding the new section 174 rules is essential in order to prevent costly surprises and preserve cash flows.
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