When you are making preparations for a business sale tax due diligence could seem like an afterthought. Tax due diligence results can be crucial to the success or failure of a business deal.
A thorough analysis of tax laws and regulations can identify potential issues that could cause a deal to fail before they become a serious issue. They can range from the fundamental complexity of a company’s tax situation to the nuances of international compliance.
The tax due diligence process also examines whether a business is able to establish tax-paying presence in other countries. A foreign office, for instance can result in local excise and income tax. Although treaties can mitigate the consequences, it’s crucial to be proactive and be aware of the potential risks and opportunities.
As part of the tax due diligence workstream, we analyze the contemplated transaction and the company’s past transactions in the areas of acquisition and disposal as well as look over the company’s documentation on transfer pricing and any international compliance issues (including FBAR filings). This includes analyzing the assets and liabilities’ tax basis and identifying tax attributes that could be used to maximize value.
For instance, a business’s tax deductions could be higher than its tax-deductible income, leading to net operating losses (NOLs). Due diligence can be used to determine if the NOLs are able to be realized and if they are transferable to an owner who is an income tax carryforward or used to reduce tax liabilities after a sale. Unclaimed property compliance is a different tax due diligence issue. While it isn’t a topic of tax taxes, tax authorities in states are increasingly scrutinized in this area.