Transaction Cost Analysis

PRIMARY CONTACTS: Daniel Phillips CPA (Pittsburgh), Mary Richter CPA (Pittsburgh)

Maximize Hidden Deductions Related to Transaction Costs 

Mergers, acquisitions and divestitures are major financial transactions that involve numerous and significant costs and expenses along the way. These fees and expenses can have a major after-tax impact on the final cost of a transaction. Performing a Transaction Cost Analysis (a TCA) can generate significant tax savings opportunities by identifying certain costs and expenses that may be deductible currently, or over time. In addition, a TCA helps manage the tax risks associated with the transaction and the allocation of transaction costs by applying and documenting the necessary due diligence in determining the proper tax treatment of transaction costs. Tax rules generally require capitalization of transaction related expenses, unless certain specific criteria are met to allow current deduction or amortization of these expenses over a prescribed period.

Since the effective date of Accounting Standards Codification Topic 805 (ASC 805), Business Combinations, there has been a divergence between the treatment of transaction costs for (U.S. GAAP) financial accounting purposes and for income tax purposes. ASC 805 requires all transaction costs to be expensed as incurred. For tax purposes, however, transaction costs might be appropriately expensed as incurred, capitalized as a separate intangible asset, included in the basis of shares acquired, included in the basis of other assets, or included in tax-deductible goodwill. Thus, the key tax question becomes, how does a taxpayer minimize the U.S. GAAP impact on net income and maximize tax deductions from transaction costs to alleviate this difference between “book” and “tax” accounting treatment for such costs?

A TCA distinguishes the deductibility and capitalization of costs associated with transactions for income tax purposes. As well as providing documentation for tax return deductions, IRS audit documentation and FIN 48 support relating to these deductions, with proper analysis, certain fees may qualify for an immediate deduction often resulting in significant cash savings.