The current slowdown in the mergers and acquisitions (M&A) market provides an ideal time for private equity funds to reassess the tax positions of their portfolio companies before any potential issues turn into costly headaches. M&A volumes and values are expected to continue decreasing into the second half of the year, offering a valuable window of opportunity.
Due diligence in key areas such as sales tax nexus, independent contractor classifications and transfer pricing can help firms mitigate risks upon exit. This entails clarifying the tax status from initial due diligence reports and confirming that any raised tax issues have been handled by the firm’s CFO and tax advisors.
It is also important to address changes in business and tax laws, including the Supreme Court’s Wayfair decision that restructured the sales tax nexus landscape, leading several states to adopt economic nexus principles to establish state income tax nexus. Sales tax remains the most overlooked issue among targets, particularly within businesses focusing on cloud computing and software as a service (SaaS).
Reviewing the use of independent contractors is equally crucial as both IRS agents and the Department of Labor take a keen interest in this area, with new regulations released in January about worker classifications. These standards are particularly applicable to transportation companies and consulting businesses that rely heavily on contractor expertise.
For multinational companies, transfer pricing is another potential area of interest for the IRS. The organisations have announced that part of its expanded budget will be used to focus on these pricing deals. Moreover, there is also an issue of Foreign Bank Account Report (FBAR) filings, with severe penalties for failure to file.
The IRS also seems to be increasing its audits of self-employment contribution compliance by limited partners. This applies to both who is and isn’t a limited partner for self-employment contribution purposes.
Ignorance of these tax health checks may not lead to immediate issues, but continuous neglect is a long-term risk business cannot afford, and those unaddressed matters will likely be identified upon exit.
Check the full details on the Bloomberg Tax article by Jerry Schwartzman, head of M&A tax services at Stout, and other experts from Stout.