Often overlooked by consumers focused on quality of earnings analyses and other non-financial persistance reviews, duty due diligence is certainly an essential section of the M&A method. With the complexness of Federal, state and native tax regulations, the numerous taxes enforced by businesses, aggressive (and sometimes evasive) approaches employed to reduce or defer property taxes, vigorous adjustment by demanding authorities and expanding relies for developing state duty nexus, M&A transactions present significant potential risks that would otherwise always be hidden with no thorough overview of tax affairs.
Tax due diligence, generally performed on the acquire side of an transaction, examines all types of taxation that may be enforced upon a business and demanding jurisdictions it might fall under. It is more concerned with significant potential tax exposures (such while overstated net operating loss, underreported taxes payable or deferred and unrecognized taxable income) than with comparatively small overlooked items, including an incorrectly disallowed meals and entertainment deduction, which are included in the preparer penalty exception under Circular 230.
Practice tip: Moreover ensuring data integrity in M&As with top-tier VDR solutions to performing tax due diligence at the buy side of M&A transactions, savvy CPAs will conduct sell-side taxes due diligence with regards to clients taking into consideration the sale of their particular company. This is certainly an effective way to distinguish potential deal-breakers, such as a lack of adequate condition tax reserves or unknown or outstanding tax debts, which could impact the sale price of a business. By responding to these issues just before a potential buyer finds out them, vendors can maintain control over the M&A process and potentially negotiate a higher deal price with regards to business.