September 3, 2025 • 36 mins
On this episode, we’ll look at ways that the One Big Beautiful Bill Act affects mergers and acquisitions (M&A) and cover our top five considerations for those contemplating a transaction. We welcome Howard Wagner from our Washington National Tax Office and Todd Reinstein, a partner in our firm who focuses on structuring and M&A Planning.
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Episode Transcript
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(00:00):
On this episode, we'll look into waysOB3 affects M&A.
Between purchase model updates,to election alternatives,
to identifying more transactionswith potential gain exclusions,
we'll cover our top five considerationsfor those considering a transaction.
We welcome Howard Wagnerfrom our Washington National Tax Office
(00:20):
and Todd Reinstein,
a partner in our firm that focuses onstructuring and M&A planning.
From your one stop for taxupdates and analysis, I'm Iris.
And I'm Devin.
It's Wednesday, September 3rd,and this is Tackling Tax.
(00:49):
Before we get startedwith our much-anticipated guests,
we always start our show
with four stories that we thinkmight be most impactful to you.
So let's dive right into these FastFour stories of the week.
Back in business.
Congress is back from recessthis week after the Labor Day holiday.
(01:09):
By the end of September,they will need to pass 12 appropriation
bills, or a continuing resolution,if they are to keep the government funded.
So, there's a lot of activitycoming our way,
and of course, we will keep you postedas we have updates.
As an update from a prior episode,The U.S.
and EU have issued a joint statement
establishing a frameworkfor a trade agreement.
Now this is coming on the heelsof previously released statements
(01:32):
that both the U.S. and EU made separately.
Considering that there were somediscrepancies between these statements,
the joint statement addsclarity and expands on the deal.
So, some highlights include that the EUwill eliminate tariffs on all U.S.
industrial goodswhile expanding market access for U.S.
seafood and agricultural goods.
On the other hand, the U.S.
(01:52):
will apply the higherof the Most Favored Nation
(MFN) tariff rate, or 15%, on EU goods.
Then, beginning on September1st of 2025, only MFN
tariff rates will be imposed on certainEU products
like cork and pharmaceuticals.
The EU also agreed to $750 billion in U.S.
(02:14):
energy purchases, $40 billion in U.S.
AI chips, $600 billion in investments
by European companies into the U.S.,and the purchase of military equipment.
Devin,
one point I didn't see in thereactually was any sort of mention
about digital service taxes, which I knowas we've been talking in the past,
(02:35):
are one of the things
that President Trump's administrationis, like, staunchly against.
Any thoughts on whether this agreementwill eventually address that issue
or maybe not?
No, you're right.
It's not there at the moment.
Actually, the EuropeanCommission's factsheet on the agreement
specifically notesthat DSTs are not impacted by the deal.
Now, whether that gets incorporatedbefore the final agreement is made,
(02:59):
we'll just have to wait and see.
Keeping in a similar vein,some interesting
developments on the tradefront with China and India.
So, the U.S.
has a 50% tariff on India dueto their Russian oil imports,
which coincides
with the Prime Minister of India toutingtheir improved relationship with China.
At the same time, the U.S.
Treasury Secretary has said that the U.S.
(03:20):
and China relationshipsare also improving, despite the looming
deadline for the paused tariffrate increases on the country.
To quote Bessent,“China is the biggest revenue line
in the tariff income,so it's if it's not broke, don't fix it.
We have had very good talks with China.
I imagine we'll seethem again before November.”
On a lighternote, one of my favorite topics for Fast
(03:42):
Four is the leadership changes at Treasuryand the IRS.
This time around, Michael Falconer,the Deputy Treasury
Secretary, is resigning.
Now, you may remember that name
because he was one of this year'smany IRS commissioners.
Jim Wang will take over as actinginternational tax counsel
at Treasury, replacing Lindsay Kitzinger.
(04:03):
Lastly, three individuals were placedon administrative leave.
Executive Director of Online ServicesKaren Howard,
Tax Exempting Government EntitiesDivision Leader Robert Choi
and Chief of the Direct File ProgramBridget Roberts.
So, Devin, is this an indicationof the future of those respective areas
or what's going on?
(04:24):
You know, it would really justbe speculation for me to comment there.
But obviously there have beena lot of changes to leadership lately.
For sure.
And we'll keep those updatescoming as we get them.
But with that, let's move onto the main attraction of today,
our segment called Planning Insights.
(04:46):
And today's segment of Planning Insights,
we have Howard Wagner and Todd Reinsteinhere to talk about their top
five ways that the One Big BeautifulBill Act, or OBBBA, or OB3,
or however you want to call it, impactsthose considering M&A transactions.
Howard is part of our WashingtonNational Tax office, focusing mainly
(05:06):
on corporations, section1202, debt instruments and more.
Todd Reinstein is a partnerlocated in Washington, D.C.,
that serves clients of all kindsbut has a special affinity
for structuring and efficientM&A planning.
Welcome to Tackling Tax, Howard and Todd.
Howard, let's start with you.
You came to us with a list of your
(05:27):
sort of top five thingsto think about with OBBBA and M&A.
What's the first pointyou'd like to talk about here?
Yeah,
I thinkthe first thing I'd like to talk about,
and it was one of the most significantprovisions
that businesses wanted out of the taxlegislation,
was some relaxation of the rulesregarding deductibility of interest.
(05:49):
When the Tax Cuts and JobsAct came in 2017,
they placed a limitation on a taxpayer'sability to deduct interest expense.
It's gone through some changesover the years, but prior to OBBB,
a taxpayer could only deductinterest expense up to effectively
(06:10):
30% of tax basis EBIT – earnings
before income taxes.
They made a change effective for the ‘25
tax yearand beyond that allows a deduction
of interest expensenow up to the 30% of tax basis EBITDA.
So now when you compute your basethat your deduction is based off of,
(06:34):
that 30% base includes the company'sdepreciation and amortization.
There's often quite a bit of debtfinancing
involved in M&A transactions.
The 30% of EBIT limitwas providing a significant constraint
on acquirers to deduct interest expense.
And this changeshould give some breathing room to folks
(06:58):
to take some increasedinterest expense deductions.
So I'm hearing it's an overall taxpayerfavorable consideration.
Is that right?
Overall taxpayer favorable consideration
in as you're doingyour financial models for,
you know, what you're going to look likeafter the deal,
what type of interest expense deductionsyou're going to take,
(07:21):
you're going to be able to factorin some additional interest deductions
as you make your decisions on how to dothe debt versus equity mix on your deals.
Perfect.
Todd,I know there's a little more nuance.
We're getting a little tax technical here,but could you talk about another
little bit of this interest limitationchange with OBBBA?
(07:44):
Yeah.
You know, well,
one of the things that wasreally interesting is when you had the 30%
EBIT limitation that Howard was mentioningon your interest expense deductions.
As you can imagine,there are a lot of taxpayers who sought to
engage in tax planning and look for waysto potentially capitalize
that interest expense or interest costto shorter-lived assets
(08:06):
as a way to kind of recoverthat interest expense sooner than later.
And the IRS had taken a dim view of this,
you know, in the past.
And one of the interesting thingsthat was included in this bill
was actually a provision that stated
for years after 2025,
(08:28):
taxpayerscould no longer capitalize interest
as to these items as opposed to deducting
and so was going to be subjectto this 163J limitation.
One of the
interesting things is itsays for years after ‘25,
but it doesn't explicitly saythat means for years before that
(08:51):
it was an opportunity.
In other words,it doesn't necessarily mean
that the IRS has taken a different viewon years before ’25 or not.
It just says for sure for years after ‘26.
So, just thought we'd highlightthat is in the bill.
If there are taxpayers out therewho are looking to,
do any of this planning,whether it's whether it's viable or not.
(09:15):
Howard, I know that bonus depreciationwas another big topic of OB3.
Can you maybe give us a high-level rundownof what changed there
and how that's going to impacttransactions?
So, bonus depreciationhas had a couple of different lives
and variations along the way.
Bonus depreciationas enacted by TCJA had a phase out.
(09:35):
So, you would have gotten 40% bonus
depreciation in 2025.
And then it would have eventuallyphased out, I think, by 2027 down to zero.
Bonus depreciation is back with 100% bonusdepreciation
for most tangible,personal property acquired
after January 19th, 2025.
(09:55):
So, whether you're buying assetsas part of your business
or whether you're buying assetsas part of a business acquisition
for most of
your five-, seven-, and 15-year property,you'll be able to take 100% bonus
depreciation and deduct that in the yearthat it's purchased,
rather than taking the depreciationover a period of time.
(10:18):
What that means if you're doing an assetdeal,
is you'll be able to deduct
a lot of the amounts allocated to
PP&E in year one,
rather than over time big timevalue of money benefit.
And it's another one of those thingsthat as you're modeling
whether to do a stock dealor an asset deal,
(10:40):
the additional cash flowof getting the deduction up
front has a time value of moneybenefit that puts money in your pocket.
Now, Todd, I guess one of the thingswe run into from time to time
is, as a buyer,we want to buy assets, and as a seller,
the seller wants to sell stock,especially in certain situations with
pass-through entitiesor corporations that are going to have,
(11:03):
you know, double tax on the gain.
You know,I guess as you're thinking about this,
as you're advising a buyer,I guess they need to update their models
to figure out how quicklythey're going to get the benefit
versuswhere they're going to get it before
and if they're going to potentiallypay a gross up to the seller.
This might give them some more flexibilityin making the numbers
(11:24):
work on the gross up?
Yeah, I think so.
There's clearly more modeling that'sinvolved for that particular reason.
The other thing is, I think it createskind of an interesting negotiation tool.
You know, I've seen this beforein the past where you have buyer
and seller.
Clearly,you know, the buyer wants this provision.
The seller has to maybeaffirmatively agree to the,
(11:45):
you know, to make the election, depending
on the type of transactionand the timing of the deal.
And so, sometimes it comes down to who's going
to get the value of making the selectionfrom a cash perspective.
And you're 100% right.
The only way you could even get therebefore you even negotiate
is to actually model this out under eitherscenario, asset
(12:07):
or stock deal, and sort of figure outwhat the ramifications of each are.
Well, all wonderful points.
I think, you know, in your intro, Howard,
we introduced to you as “The 1202 Guy”a little bit.
So, I do know that was one of the things
in OB3 was some changes to section 1202.
(12:27):
So that is a code sectionI know not everyone is familiar with.
Could you give us to startsort of like a thousand-foot explanation
of the opportunities thereand what we're talking about?
Section1202 may be one of the most powerful
incentives in the tax code.
What it effectively says is
(12:48):
if you're a non-corporate taxpayer, i.e.
individual, estate, trust,
and you make an investmentin a C-corporation,
and under the existing rules,if at the time you made that investment,
the C-corp had generally assetsof $50 million or less,
and if you held that stockfor at least five years,
(13:11):
then upon the sale of thestock, you could exclude from
your income
the greater of 10 timesyour tax basis in the stock, or
$10 million, there are some restrictionsthat come into play.
There's notevery business is eligible for 1202.
There's a lot of thingswhere you think you're going to get 1202
(13:34):
and something intervenes and you find outit's not going to be available
based on your company-specific factpatterns.
There's some very significant detailsyou need to get over,
but if you think about it,if you invest $10 million in a business
and you sell that businessfor a big profit,
you can exclude up to $100 million.
(13:56):
I mean, it's a very powerful tax benefit.
They made three changes in 1202
effective for stock issuedafter July 4th of 2025.
The first one is the size of the businessthat's eligible for 1202.
Under the old rules,the company had to have assets
at, including the amount of moneyyou put in for stock,
(14:19):
of $50 million immediatelyafter you issued the stock.
That is now, that threshold is nowbeen raised to 75 million.
So some good-sized businessescan qualify for this.
The second thing they didis they increased the gain threshold.
It used to be ten times basis the greaterof ten times basis or $10 million.
(14:42):
Now it's the greater ten timesbasis or $15 million.
You know, where that really mattersis if you put $1
million into the stockand had a very large gain,
you were going to be cappedat $10 million under the old rules.
Now you'll be able to get $15million of exclusion.
The other thing they did,and this is really a
(15:03):
welcome benefit,is there's a new scaled exclusion.
Under theold rules, you had to get to five years.
If you got to five years,it was a full exclusion.
If you were at four years and 364
days, you got no exclusion.
And Todd and I have both had a lot ofconversations with clients along the way
(15:26):
over the years who three and a half yearsin, they get the offer of a lifetime.
They know they'll never get thatkind of money for their company again.
They may also know that
due to potential changesin their business environment
or competitors, that the companymight be worth less a year and a half
from now, when they get to the five years,than they were before.
(15:49):
And they, you know, Todd,
they had some real tough decisionsto make on do I sell and pay tax
or do I hold out for five yearsand get the exclusion?
We've got a new scaled exclusion
now that gives you a 50% benefitafter three years,
75% benefit after four years,and then full benefit after five.
(16:13):
When you're
selling it before five years,the gain is taxed at a 28% rate.
So the 50% exclusionmeans you pay tax at 14%.
The 75% exclusion means you pay tax at 7%.
It just gives people a lot of flexibilityto make good business decisions
and still participatein the power of section 1202
(16:37):
and what it offers without having to makesome really tough choices.
Yeah, I totally agree.
You know, the other thing, and you and Ihave talked about this: private equity
traditionally backed awayfrom this provision,
even though it would be super beneficial
to the LPs on their investmentsand in their portfolio.
And it was always the five-yearcliff, right?
(16:58):
They might look at the duration ofthe fund was less than five years.
They didn't want to spend the timeand the money
investing in and qualifying for 1202.
This has totally changed the game,even if it's a partial benefit.
It's something that they're completelyseeking out.
Now, when you look at smallermid-market private equity companies,
(17:18):
as they make their investments intovarious portfolios, I think that they are,
you know, there really is a strong demandin looking at this now.
I mean, we're spendinga lot more time on it
than we have in the prior six months,that's for sure.
Todd, I want to shift to youand talk about a provision
that has caused me more frustrationthan arguably any other provision
(17:39):
in the Internal RevenueCode, and that’s section 382.
I know that the
OB3 didn’t necessarilymake any direct changes to section 382,
but as I understand,there are other changes that indirectly
have impacted that code section.
Can you maybe walk us through that?
What is 382?
And then what were those other indirectchanges that are going to impact that?
(18:03):
Well, first of all, Devin, I'msorry to cause you so much pain and angst,
but, really high level,all the provision does is
it says if you have a corporationand it's carrying forward
attributes, typically we think about thisas net operating loss carryforwards.
If that corporation, we lookat all of the 5% shareholders by value,
(18:23):
and we look at how much their ownershipis on a given equity or testing date,
and we look at what that number is,and then we look back
three years over the testing periodand we say, what's the lowest point
that that same 5% shareholder owned,and we take the difference
between what they own todayand whatever that low was over
the sort of three year rolling window,and that becomes a shift in ownership.
(18:48):
And then we aggregateall those shifts in ownership
and if they are greater than 50%,
the company’s consideredto have had an ownership change.
And if there has been an ownership change,then the tax losses are limited,
based on the value of the companyimmediately before the ownership change.
All the code says that you dois you take the value immediately
(19:11):
before times whatever the long-termtax-exempt rate, like whatever
the municipal bond ratewas for that month, multiply that and then
that becomes an annual limitationof the amount of losses that you can use.
There's obviously, as you said,because it's very painful,
there's some more mechanicsand some other,
you know, bigger issues within 382.
But those are the basics.
(19:31):
Now, the OBBBA didn't change any of that.
They haven't had a change,I would say, to the 382 code
other than in TVJA by addingthe 163J interest as a carryforward item
subject to limitations that Howardhad talked about at the beginning
of the podcast in a very long time.
(19:54):
But there are some planning ideas around
some of the other operative provisions,I would say, when in M&A context.
You know, Howard did a really good jobof explaining bonus depreciation.
You know, that negotiationthat we were talking about between a
maybe a buyer and sellerand whether we should make the election
to expense the tangible personal propertythat were purchased?
(20:16):
Well, if you think about it, if you'regoing to undergo an ownership change
and that extra depreciation from the bonusis only going to augment
the net operating loss carrying forward,and then it's going to be subject
to this limitation.
Well, maybe making that electionis not so great from a buyers perspective.
(20:36):
Maybe you'd rather hang that upand have traditional MACRS depreciation
spreading out that, sort of, depreciationdeduction over a period of time,
as long as you're not in a net-unrealizedbuilt-in loss company, which means that
the tax basis over the overall assetsis greater than the value.
That could be a great planning technique.
(20:56):
And as a buyer, it's something you mightwant to negotiate with the seller
if they haven't made the electionalready prior to your purchase.
You may say hold off on doing that.
I'd rather you capitalized and continueto amortize or depreciate that.
Let's say over, like Howard said,5, 7, 15 years, whatever the number is.
So that's kind of a deal pointto think about from another provision
(21:19):
that kind of effects 382,because we don't want to box ourselves in
and limit those costs.
Same thing herewith capitalized research costs.
You know, one of the big thingspeople cried about was, in TCJA,
was this requirement,I believe starting in 2022,
that you capitalize your researchand experimentation credits
(21:41):
going forward
and then amortize those over eitherfive years or 15 years.
They've changed that in this bill.
Well, hurrah.
That's great.
I can elect just to go aheadand expense them like before.
But just like I mentioned
with the bonus depreciation,if you're just enhancing or augmenting
or adding on to your NOL, it'sgoing to be limited.
Maybe you're better off capitalizing those
(22:02):
expenses and spreading them outover a period of time.
That's a common techniqueyou've always seen
because there used to be,in the AMT regs, there was an election
you could do and spread outyour research costs over 10 years.
That was sort of a common techniquefor life science and technology companies
that were most of their costs,they were pre-revenue,
(22:23):
were just incurring all these costsand research and experimentation.
It was routine to do that,to avoid the impact of 382
so that was a way to amelioratethat issue by pushing off
the costtill after the ownership change occurs.
And those strategies can also havean impact on one other component of 382.
When they came out with 382, people
(22:44):
cried about it to Congressand they said, wait, this is very unfair.
What if I had kind of a built-ingain asset on my books
prior to the ownership change,and then I sold it after?
Congress 1980s, yeah, we agree with youso we'll let you match
pre-change gains with pre-changelosses, right?
And those are called recognized built-ingains.
(23:07):
The good news for that is, in 2003the IRS even expanded
what that definition wasand said you can look at, like,
even just the overall enterprisevalue as a built-in gain asset.
So, by electing theseand making them capital,
you may or may not,you have to model it out
kind of like we were talking about before,you may have an impact
(23:27):
on what your built-in gainis following an ownership change,
on whether you made one of these electionsor not.
Again, that's part of itbecause the built-in gain
can increase your 382
limitation if you have enough of itand it makes enough sense.
So a lot of details there for a shortexplanation, but the bottom line is
you need to consider it and model it out.
(23:49):
And youknow Todd, one thing that's interesting
about this one compared to the others,most of the others have been
in the context of I'm selling my company
to somebody else and giving up control.
This comes into playfor a lot of growth stage businesses
as they're going through capital raises
and having shifts in ownershipas a result of those capital raises.
(24:10):
Or alternatively,if you've got a business that has maybe
had a negative turn of eventsand is doing some capital raising
that, you know,these can also come into play as well.
So this one has a little more broaderapplicability than just
your traditional buy-sell situations.
Absolutely. Capital raises are huge.
(24:31):
You can have a huge impactif they're not the same investors, right?
If you have the exact same investors,same percentages
and your A, B, C, D rounds, whatever,you typically don't have a change.
But that's very uncommon.
You usually have new investors
coming in at different rounds,maybe with different amounts.
And that can cause a change in ownershipwhen you incurred the losses,
(24:52):
creating a limitation.
I'll tell you, the other areathat's coming up constantly these days is
you might have a foreign parentthat owns 100% of a U.S.
subsidiary and think,
so these rules don't apply to me,or they're doing M&A with those U.S.
subsidiaries which have losses.
This is what's 100%owned. There's no change in ownership.
These rules looked all the wayup the chain to indirect ownership
(25:12):
and something that you need to consider
in an M&A context,
even if you're doing cross-border dealsand you have a U.S.
subsidiarythat has these potential tax attributes.
Great point you brought up.
Well, that's a lot of corporate talkfor a girl who's grown up
with partnership tax as her favorite,you know, part of the code.
(25:33):
So, Howard, can we move on to,you know, flow-through
entities, partnerships, S-corporations,that kind of thing?
And maybe how OB3 affects them?
Yeah, a couple things to consider
with flow-through entities,especially on the sell side.
One is with TCJA
(25:53):
we got the $10,000 SALT cap.
What statesimmediately did for pass-through entities
was develop alternate tax systemswhere the pass-through entity,
the partnership, or the S-corporation
pays the tax on behalf of the owners.
It is styled
(26:15):
and approved through an IRS noticethat is of questionable technical merit,
but nevertheless blessed by notice 2020-75
that basically says when you
have these alternate tax regimes,
you can have the businesspay the tax on behalf of the individuals.
(26:37):
It's treated as a business tax deduction,
not an itemized taxdeduction of the individual.
And it gets you around the deductionlimitations of the itemized deductions.
And in certain situationsmay get you around
some of the alternative minimum tax issuesas well that you have with these.
There was a lot of talkas the legislation progressed
(26:59):
as to whether these pass-through entitytax benefits would be curtailed
or eliminated,or only allowed for certain businesses.
Through the negotiation processthat they went through
to get the deal done,these were maintained.
The good news is they were maintained.
Where it getsinteresting is how you use them.
(27:23):
If you
start with the assumptionthat Todd and I own,
50-50, an S-Corp
and we're going to sell our S-Corporation
stock to Devin for cash.
If we sell our S-Corporationstock to Devin for cash,
(27:44):
that's viewedas a sale of the stock of the company
rather than businessincome of the company.
And for the most part,there's a few states
who interpret this differentlyfor the most part, you won’t be able
to use your state and local tax workaroundon that transaction because that's going
(28:05):
to hit your individual return,not the face of the business return.
So the immediate thought would be, well,geez, Todd
and I should have the company sellits assets to Devin
and then liquidate.
And if we do that,then that would get us into
it being
(28:26):
business income of the S-corporationor of the partnership,
as the case may be, and would be ableto use the state workarounds.
If you just stop there,that's a great answer
because you can get a full statetax deduction.
The problem you run into in S-Corps,
and to a lesser extent with a partnership,you maybe
(28:49):
have the same problem with a partnership
whether you sell interests or assets.
When you sell the assets
of the business,you have the potential for taking
what would have been capital gainand turning it into ordinary income.
That would be subject to the 37% tax rate,
(29:10):
rather than the 20% capital gains rates.
So at first blush, you would say,I would always want to have the business
entity sell assets to take advantageof the pass-through entity tax.
And the buyer may like thatbecause they get their step up.
The flip side isyou may end up with more ordinary income.
And if your buyer’s not giving youa gross up, you may cost yourselves
(29:32):
more in ordinary incomethan you save yourselves in state taxes.
It's just added complexityto how you go about disposing
of your pass-through entity.
Todd, I think we've all been through
a myriad of variationson that calculation, but
selling the business entity versus sellingthe assets definitely has an impact
(29:52):
on the pass-through entity taxesand the ability to take it.
Yeah, absolutely.
And it all comes down to modeling, right?
I mean, yeah don’t you think?
Yeah.
You know, there are some states now
that will treat the sale of the interestas a sale of the underlying assets
in an attemptto impose the tax on out-of-state folks.
So that comes into play as well.
(30:12):
There's another provisionthat was put out there
in TCJA in 2017that was supposed to expire in ‘25.
Then it was supposed to expire in ’28or after ‘25.
Then it was supposed to expirein ‘28 or ’29.
And now it's been made permanent.
Section 461 L.
(30:32):
And what it says is, as an individual,you can't deduct
trade or business lossesin excess of $600,000.
After that,it becomes a net operating loss
deduction that's deductiblein the next taxable year.
So for example,if I put $10 million into a business
(30:53):
and I'm active in the business and in yearone, I get a K-1 from a partnership
or an S-Corp that says I lost$5.6 million, I get to deduct
$600,000, and
$500,000 becomes a net operating loss
deductible in the next year,subject to the 80% limits.
(31:15):
So that's just an example in generalas to how these limitations work.
When you are disposingof a pass-through entity,
there's a myriad of problemsthat can come into play
with the interplay of this 461 L rule,
and with the disposition of an interest.
Say I've got that samepass-through entity,
(31:36):
and I've continued to have losses,and now I've got a loss
that's been suspended in excessbecause of basis limitations.
When I sell my pass-through entityat a gain
that's generally going to free upthe suspended losses.
If the partnership or S-Corp
is selling its interest,I'm sorry, selling its assets,
(32:00):
that's going to be trade or businessincome, that frees up these losses.
So, say I've got a suspended loss carryforward of $1 million.
The partnership or S-Corp sellsits assets at a gain of $10 million.
I'll generally be viewed as having
trade or business income of $9
million, the $10 million of gain
(32:22):
from the sale, offsetby the $1 million loss carry-forward.
And I'll go on my wayand I won't have any limitations.
If, instead, what happens isI sell the stock of the S-Corp,
you've got to, and record the gain
that way,you've got a fundamental question as to
whether or not the sale of the S-Corpand potentially the sale of a partnership
(32:44):
as well, gives rise to what's definedas trade or business income,
that allows you to free up
the trade or business lossthat's carried forward.
It could be something carried forward
because of basis limitationsthat frees up.
It could be something carried forwardbecause of the interest expense
carry-forward rules upon salethat frees up
(33:06):
a lot of different situationswhere this can come into play.
Therehasn't been any guidance on this yet.
We hope to get some at some point,
but selling your partnershipor S-Corp interest with freed-up suspended
losses can be an unwelcome surprise,or at least add a lot of risk to
positions you take on a sale.
(33:27):
So that's just something to watch out foron the exits from pass-through entities.
We thought this problemwould eventually go away,
but now the provisionhas been made permanent.
And here we are.
So, all good things.
Those are, you know, five of what we seeas some of the most important
considerations from OBBBA when we'retalking about M&A transactions.
(33:49):
So a big, bigthank you to Howard and Todd here.
Our dynamic duo.
We hope to have you back hereon the show soon.
And thank you for your time today.
Thank you both.
Iris,it seems like there is a reoccurring theme
across episodes here,and that is one of modeling
For sure.
(34:09):
I think we heard, you know, Mike Cornett,who was on the show, what,
two episodes ago,Devin, talk about modeling.
And in this, you know,in the realm of international tax.
And here we are again with M&A.
So, just wanted to call outthat here at Forvis Mazars we actually do
have some new modeling service offeringswithin relation to OBBBA,
(34:33):
and if you're interested in that,whether it be because, international tax
considerations, you have a transactionor just looking at your year-end
tax provisions, reach out to us,you can get us on our website
or the WashingtonNational Tax Office website as well.
And we'd be happy to connect youwith the right folks.
So thanks for that.
(35:00):
Each episode will bring you what we calla Focused FORsight of the week,
an article or recordingthat might be of interest to you.
This week's FocusedFORsight is an article titled
Beginning of ConstructionNotice 2025-42, Solar and Wind Facilities.
Now, you may rememberfrom previous episodes that we've talked
about President Trump's executive orderfor Treasury to issue guidance
(35:22):
about beginning of construction dateswith relation to solar and wind projects.
The resulting notice has just come out,and we take a look into it
in this FORsight.
So you can always access our FORsightson the Washington National Tax
Office websiteor at the Forvis Mazars U.S.
website more broadly.
And that's our show. Thanks for joining.
(35:43):
Remember to subscribe and listenfor the next episode of our podcast.
Until next time.
The information set forth in this podcastcontains
the analysis and conclusionsof the panelists based upon his, her,
or their research and analysis of industryinformation and legal authorities.
Such analysis and conclusionsshould not be deemed
(36:03):
opinions or conclusions by Forvis Mazarsor the panelists
as to any individual situationas situations are fact-specific.
The listener should performtheir own analysis and form
their own conclusionsregarding any specific situation.
Further, the panelists’ conclusionsmay be revised without notice,
with or without changes in industryinformation and legal authorities.
On this episode, we'll look into waysOB3 affects M&A.
Between purchase model updates,to election alternatives,
to identifying more transactionswith potential gain exclusions,
we'll cover our top five considerationsfor those considering a transaction.
We welcome Howard Wagnerfrom our Washington National Tax Office
(00:20):
and Todd Reinstein,
a partner in our firm that focuses onstructuring and M&A planning.
From your one stop for taxupdates and analysis, I'm Iris.
And I'm Devin.
It's Wednesday, September 3rd,and this is Tackling Tax.
(00:49):
Before we get startedwith our much-anticipated guests,
we always start our show
with four stories that we thinkmight be most impactful to you.
So let's dive right into these FastFour stories of the week.
Back in business.
Congress is back from recessthis week after the Labor Day holiday.
(01:09):
By the end of September,they will need to pass 12 appropriation
bills, or a continuing resolution,if they are to keep the government funded.
So, there's a lot of activitycoming our way,
and of course, we will keep you postedas we have updates.
As an update from a prior episode,The U.S.
and EU have issued a joint statement
establishing a frameworkfor a trade agreement.
Now this is coming on the heelsof previously released statements
(01:32):
that both the U.S. and EU made separately.
Considering that there were somediscrepancies between these statements,
the joint statement addsclarity and expands on the deal.
So, some highlights include that the EUwill eliminate tariffs on all U.S.
industrial goodswhile expanding market access for U.S.
seafood and agricultural goods.
On the other hand, the U.S.
(01:52):
will apply the higherof the Most Favored Nation
(MFN) tariff rate, or 15%, on EU goods.
Then, beginning on September1st of 2025, only MFN
tariff rates will be imposed on certainEU products
like cork and pharmaceuticals.
The EU also agreed to $750 billion in U.S.
(02:14):
energy purchases, $40 billion in U.S.
AI chips, $600 billion in investments
by European companies into the U.S.,and the purchase of military equipment.
Devin,
one point I didn't see in thereactually was any sort of mention
about digital service taxes, which I knowas we've been talking in the past,
(02:35):
are one of the things
that President Trump's administrationis, like, staunchly against.
Any thoughts on whether this agreementwill eventually address that issue
or maybe not?
No, you're right.
It's not there at the moment.
Actually, the EuropeanCommission's factsheet on the agreement
specifically notesthat DSTs are not impacted by the deal.
Now, whether that gets incorporatedbefore the final agreement is made,
(02:59):
we'll just have to wait and see.
Keeping in a similar vein,some interesting
developments on the tradefront with China and India.
So, the U.S.
has a 50% tariff on India dueto their Russian oil imports,
which coincides
with the Prime Minister of India toutingtheir improved relationship with China.
At the same time, the U.S.
Treasury Secretary has said that the U.S.
(03:20):
and China relationshipsare also improving, despite the looming
deadline for the paused tariffrate increases on the country.
To quote Bessent,“China is the biggest revenue line
in the tariff income,so it's if it's not broke, don't fix it.
We have had very good talks with China.
I imagine we'll seethem again before November.”
On a lighternote, one of my favorite topics for Fast
(03:42):
Four is the leadership changes at Treasuryand the IRS.
This time around, Michael Falconer,the Deputy Treasury
Secretary, is resigning.
Now, you may remember that name
because he was one of this year'smany IRS commissioners.
Jim Wang will take over as actinginternational tax counsel
at Treasury, replacing Lindsay Kitzinger.
(04:03):
Lastly, three individuals were placedon administrative leave.
Executive Director of Online ServicesKaren Howard,
Tax Exempting Government EntitiesDivision Leader Robert Choi
and Chief of the Direct File ProgramBridget Roberts.
So, Devin, is this an indicationof the future of those respective areas
or what's going on?
(04:24):
You know, it would really justbe speculation for me to comment there.
But obviously there have beena lot of changes to leadership lately.
For sure.
And we'll keep those updatescoming as we get them.
But with that, let's move onto the main attraction of today,
our segment called Planning Insights.
(04:46):
And today's segment of Planning Insights,
we have Howard Wagner and Todd Reinsteinhere to talk about their top
five ways that the One Big BeautifulBill Act, or OBBBA, or OB3,
or however you want to call it, impactsthose considering M&A transactions.
Howard is part of our WashingtonNational Tax office, focusing mainly
(05:06):
on corporations, section1202, debt instruments and more.
Todd Reinstein is a partnerlocated in Washington, D.C.,
that serves clients of all kindsbut has a special affinity
for structuring and efficientM&A planning.
Welcome to Tackling Tax, Howard and Todd.
Howard, let's start with you.
You came to us with a list of your
(05:27):
sort of top five thingsto think about with OBBBA and M&A.
What's the first pointyou'd like to talk about here?
Yeah,
I thinkthe first thing I'd like to talk about,
and it was one of the most significantprovisions
that businesses wanted out of the taxlegislation,
was some relaxation of the rulesregarding deductibility of interest.
(05:49):
When the Tax Cuts and JobsAct came in 2017,
they placed a limitation on a taxpayer'sability to deduct interest expense.
It's gone through some changesover the years, but prior to OBBB,
a taxpayer could only deductinterest expense up to effectively
(06:10):
30% of tax basis EBIT – earnings
before income taxes.
They made a change effective for the ‘25
tax yearand beyond that allows a deduction
of interest expensenow up to the 30% of tax basis EBITDA.
So now when you compute your basethat your deduction is based off of,
(06:34):
that 30% base includes the company'sdepreciation and amortization.
There's often quite a bit of debtfinancing
involved in M&A transactions.
The 30% of EBIT limitwas providing a significant constraint
on acquirers to deduct interest expense.
And this changeshould give some breathing room to folks
(06:58):
to take some increasedinterest expense deductions.
So I'm hearing it's an overall taxpayerfavorable consideration.
Is that right?
Overall taxpayer favorable consideration
in as you're doingyour financial models for,
you know, what you're going to look likeafter the deal,
what type of interest expense deductionsyou're going to take,
(07:21):
you're going to be able to factorin some additional interest deductions
as you make your decisions on how to dothe debt versus equity mix on your deals.
Perfect.
Todd,I know there's a little more nuance.
We're getting a little tax technical here,but could you talk about another
little bit of this interest limitationchange with OBBBA?
(07:44):
Yeah.
You know, well,
one of the things that wasreally interesting is when you had the 30%
EBIT limitation that Howard was mentioningon your interest expense deductions.
As you can imagine,there are a lot of taxpayers who sought to
engage in tax planning and look for waysto potentially capitalize
that interest expense or interest costto shorter-lived assets
(08:06):
as a way to kind of recoverthat interest expense sooner than later.
And the IRS had taken a dim view of this,
you know, in the past.
And one of the interesting thingsthat was included in this bill
was actually a provision that stated
for years after 2025,
(08:28):
taxpayerscould no longer capitalize interest
as to these items as opposed to deducting
and so was going to be subjectto this 163J limitation.
One of the
interesting things is itsays for years after ‘25,
but it doesn't explicitly saythat means for years before that
(08:51):
it was an opportunity.
In other words,it doesn't necessarily mean
that the IRS has taken a different viewon years before ’25 or not.
It just says for sure for years after ‘26.
So, just thought we'd highlightthat is in the bill.
If there are taxpayers out therewho are looking to,
do any of this planning,whether it's whether it's viable or not.
(09:15):
Howard, I know that bonus depreciationwas another big topic of OB3.
Can you maybe give us a high-level rundownof what changed there
and how that's going to impacttransactions?
So, bonus depreciationhas had a couple of different lives
and variations along the way.
Bonus depreciationas enacted by TCJA had a phase out.
(09:35):
So, you would have gotten 40% bonus
depreciation in 2025.
And then it would have eventuallyphased out, I think, by 2027 down to zero.
Bonus depreciation is back with 100% bonusdepreciation
for most tangible,personal property acquired
after January 19th, 2025.
(09:55):
So, whether you're buying assetsas part of your business
or whether you're buying assetsas part of a business acquisition
for most of
your five-, seven-, and 15-year property,you'll be able to take 100% bonus
depreciation and deduct that in the yearthat it's purchased,
rather than taking the depreciationover a period of time.
(10:18):
What that means if you're doing an assetdeal,
is you'll be able to deduct
a lot of the amounts allocated to
PP&E in year one,
rather than over time big timevalue of money benefit.
And it's another one of those thingsthat as you're modeling
whether to do a stock dealor an asset deal,
(10:40):
the additional cash flowof getting the deduction up
front has a time value of moneybenefit that puts money in your pocket.
Now, Todd, I guess one of the thingswe run into from time to time
is, as a buyer,we want to buy assets, and as a seller,
the seller wants to sell stock,especially in certain situations with
pass-through entitiesor corporations that are going to have,
(11:03):
you know, double tax on the gain.
You know,I guess as you're thinking about this,
as you're advising a buyer,I guess they need to update their models
to figure out how quicklythey're going to get the benefit
versuswhere they're going to get it before
and if they're going to potentiallypay a gross up to the seller.
This might give them some more flexibilityin making the numbers
(11:24):
work on the gross up?
Yeah, I think so.
There's clearly more modeling that'sinvolved for that particular reason.
The other thing is, I think it createskind of an interesting negotiation tool.
You know, I've seen this beforein the past where you have buyer
and seller.
Clearly,you know, the buyer wants this provision.
The seller has to maybeaffirmatively agree to the,
(11:45):
you know, to make the election, depending
on the type of transactionand the timing of the deal.
And so, sometimes it comes down to who's going
to get the value of making the selectionfrom a cash perspective.
And you're 100% right.
The only way you could even get therebefore you even negotiate
is to actually model this out under eitherscenario, asset
(12:07):
or stock deal, and sort of figure outwhat the ramifications of each are.
Well, all wonderful points.
I think, you know, in your intro, Howard,
we introduced to you as “The 1202 Guy”a little bit.
So, I do know that was one of the things
in OB3 was some changes to section 1202.
(12:27):
So that is a code sectionI know not everyone is familiar with.
Could you give us to startsort of like a thousand-foot explanation
of the opportunities thereand what we're talking about?
Section1202 may be one of the most powerful
incentives in the tax code.
What it effectively says is
(12:48):
if you're a non-corporate taxpayer, i.e.
individual, estate, trust,
and you make an investmentin a C-corporation,
and under the existing rules,if at the time you made that investment,
the C-corp had generally assetsof $50 million or less,
and if you held that stockfor at least five years,
(13:11):
then upon the sale of thestock, you could exclude from
your income
the greater of 10 timesyour tax basis in the stock, or
$10 million, there are some restrictionsthat come into play.
There's notevery business is eligible for 1202.
There's a lot of thingswhere you think you're going to get 1202
(13:34):
and something intervenes and you find outit's not going to be available
based on your company-specific factpatterns.
There's some very significant detailsyou need to get over,
but if you think about it,if you invest $10 million in a business
and you sell that businessfor a big profit,
you can exclude up to $100 million.
(13:56):
I mean, it's a very powerful tax benefit.
They made three changes in 1202
effective for stock issuedafter July 4th of 2025.
The first one is the size of the businessthat's eligible for 1202.
Under the old rules,the company had to have assets
at, including the amount of moneyyou put in for stock,
(14:19):
of $50 million immediatelyafter you issued the stock.
That is now, that threshold is nowbeen raised to 75 million.
So some good-sized businessescan qualify for this.
The second thing they didis they increased the gain threshold.
It used to be ten times basis the greaterof ten times basis or $10 million.
(14:42):
Now it's the greater ten timesbasis or $15 million.
You know, where that really mattersis if you put $1
million into the stockand had a very large gain,
you were going to be cappedat $10 million under the old rules.
Now you'll be able to get $15million of exclusion.
The other thing they did,and this is really a
(15:03):
welcome benefit,is there's a new scaled exclusion.
Under theold rules, you had to get to five years.
If you got to five years,it was a full exclusion.
If you were at four years and 364
days, you got no exclusion.
And Todd and I have both had a lot ofconversations with clients along the way
(15:26):
over the years who three and a half yearsin, they get the offer of a lifetime.
They know they'll never get thatkind of money for their company again.
They may also know that
due to potential changesin their business environment
or competitors, that the companymight be worth less a year and a half
from now, when they get to the five years,than they were before.
(15:49):
And they, you know, Todd,
they had some real tough decisionsto make on do I sell and pay tax
or do I hold out for five yearsand get the exclusion?
We've got a new scaled exclusion
now that gives you a 50% benefitafter three years,
75% benefit after four years,and then full benefit after five.
(16:13):
When you're
selling it before five years,the gain is taxed at a 28% rate.
So the 50% exclusionmeans you pay tax at 14%.
The 75% exclusion means you pay tax at 7%.
It just gives people a lot of flexibilityto make good business decisions
and still participatein the power of section 1202
(16:37):
and what it offers without having to makesome really tough choices.
Yeah, I totally agree.
You know, the other thing, and you and Ihave talked about this: private equity
traditionally backed awayfrom this provision,
even though it would be super beneficial
to the LPs on their investmentsand in their portfolio.
And it was always the five-yearcliff, right?
(16:58):
They might look at the duration ofthe fund was less than five years.
They didn't want to spend the timeand the money
investing in and qualifying for 1202.
This has totally changed the game,even if it's a partial benefit.
It's something that they're completelyseeking out.
Now, when you look at smallermid-market private equity companies,
(17:18):
as they make their investments intovarious portfolios, I think that they are,
you know, there really is a strong demandin looking at this now.
I mean, we're spendinga lot more time on it
than we have in the prior six months,that's for sure.
Todd, I want to shift to youand talk about a provision
that has caused me more frustrationthan arguably any other provision
(17:39):
in the Internal RevenueCode, and that’s section 382.
I know that the
OB3 didn’t necessarilymake any direct changes to section 382,
but as I understand,there are other changes that indirectly
have impacted that code section.
Can you maybe walk us through that?
What is 382?
And then what were those other indirectchanges that are going to impact that?
(18:03):
Well, first of all, Devin, I'msorry to cause you so much pain and angst,
but, really high level,all the provision does is
it says if you have a corporationand it's carrying forward
attributes, typically we think about thisas net operating loss carryforwards.
If that corporation, we lookat all of the 5% shareholders by value,
(18:23):
and we look at how much their ownershipis on a given equity or testing date,
and we look at what that number is,and then we look back
three years over the testing periodand we say, what's the lowest point
that that same 5% shareholder owned,and we take the difference
between what they own todayand whatever that low was over
the sort of three year rolling window,and that becomes a shift in ownership.
(18:48):
And then we aggregateall those shifts in ownership
and if they are greater than 50%,
the company’s consideredto have had an ownership change.
And if there has been an ownership change,then the tax losses are limited,
based on the value of the companyimmediately before the ownership change.
All the code says that you dois you take the value immediately
(19:11):
before times whatever the long-termtax-exempt rate, like whatever
the municipal bond ratewas for that month, multiply that and then
that becomes an annual limitationof the amount of losses that you can use.
There's obviously, as you said,because it's very painful,
there's some more mechanicsand some other,
you know, bigger issues within 382.
But those are the basics.
(19:31):
Now, the OBBBA didn't change any of that.
They haven't had a change,I would say, to the 382 code
other than in TVJA by addingthe 163J interest as a carryforward item
subject to limitations that Howardhad talked about at the beginning
of the podcast in a very long time.
(19:54):
But there are some planning ideas around
some of the other operative provisions,I would say, when in M&A context.
You know, Howard did a really good jobof explaining bonus depreciation.
You know, that negotiationthat we were talking about between a
maybe a buyer and sellerand whether we should make the election
to expense the tangible personal propertythat were purchased?
(20:16):
Well, if you think about it, if you'regoing to undergo an ownership change
and that extra depreciation from the bonusis only going to augment
the net operating loss carrying forward,and then it's going to be subject
to this limitation.
Well, maybe making that electionis not so great from a buyers perspective.
(20:36):
Maybe you'd rather hang that upand have traditional MACRS depreciation
spreading out that, sort of, depreciationdeduction over a period of time,
as long as you're not in a net-unrealizedbuilt-in loss company, which means that
the tax basis over the overall assetsis greater than the value.
That could be a great planning technique.
(20:56):
And as a buyer, it's something you mightwant to negotiate with the seller
if they haven't made the electionalready prior to your purchase.
You may say hold off on doing that.
I'd rather you capitalized and continueto amortize or depreciate that.
Let's say over, like Howard said,5, 7, 15 years, whatever the number is.
So that's kind of a deal pointto think about from another provision
(21:19):
that kind of effects 382,because we don't want to box ourselves in
and limit those costs.
Same thing herewith capitalized research costs.
You know, one of the big thingspeople cried about was, in TCJA,
was this requirement,I believe starting in 2022,
that you capitalize your researchand experimentation credits
(21:41):
going forward
and then amortize those over eitherfive years or 15 years.
They've changed that in this bill.
Well, hurrah.
That's great.
I can elect just to go aheadand expense them like before.
But just like I mentioned
with the bonus depreciation,if you're just enhancing or augmenting
or adding on to your NOL, it'sgoing to be limited.
Maybe you're better off capitalizing those
(22:02):
expenses and spreading them outover a period of time.
That's a common techniqueyou've always seen
because there used to be,in the AMT regs, there was an election
you could do and spread outyour research costs over 10 years.
That was sort of a common techniquefor life science and technology companies
that were most of their costs,they were pre-revenue,
(22:23):
were just incurring all these costsand research and experimentation.
It was routine to do that,to avoid the impact of 382
so that was a way to amelioratethat issue by pushing off
the costtill after the ownership change occurs.
And those strategies can also havean impact on one other component of 382.
When they came out with 382, people
(22:44):
cried about it to Congressand they said, wait, this is very unfair.
What if I had kind of a built-ingain asset on my books
prior to the ownership change,and then I sold it after?
Congress 1980s, yeah, we agree with youso we'll let you match
pre-change gains with pre-changelosses, right?
And those are called recognized built-ingains.
(23:07):
The good news for that is, in 2003the IRS even expanded
what that definition wasand said you can look at, like,
even just the overall enterprisevalue as a built-in gain asset.
So, by electing theseand making them capital,
you may or may not,you have to model it out
kind of like we were talking about before,you may have an impact
(23:27):
on what your built-in gainis following an ownership change,
on whether you made one of these electionsor not.
Again, that's part of itbecause the built-in gain
can increase your 382
limitation if you have enough of itand it makes enough sense.
So a lot of details there for a shortexplanation, but the bottom line is
you need to consider it and model it out.
(23:49):
And youknow Todd, one thing that's interesting
about this one compared to the others,most of the others have been
in the context of I'm selling my company
to somebody else and giving up control.
This comes into playfor a lot of growth stage businesses
as they're going through capital raises
and having shifts in ownershipas a result of those capital raises.
(24:10):
Or alternatively,if you've got a business that has maybe
had a negative turn of eventsand is doing some capital raising
that, you know,these can also come into play as well.
So this one has a little more broaderapplicability than just
your traditional buy-sell situations.
Absolutely. Capital raises are huge.
(24:31):
You can have a huge impactif they're not the same investors, right?
If you have the exact same investors,same percentages
and your A, B, C, D rounds, whatever,you typically don't have a change.
But that's very uncommon.
You usually have new investors
coming in at different rounds,maybe with different amounts.
And that can cause a change in ownershipwhen you incurred the losses,
(24:52):
creating a limitation.
I'll tell you, the other areathat's coming up constantly these days is
you might have a foreign parentthat owns 100% of a U.S.
subsidiary and think,
so these rules don't apply to me,or they're doing M&A with those U.S.
subsidiaries which have losses.
This is what's 100%owned. There's no change in ownership.
These rules looked all the wayup the chain to indirect ownership
(25:12):
and something that you need to consider
in an M&A context,
even if you're doing cross-border dealsand you have a U.S.
subsidiarythat has these potential tax attributes.
Great point you brought up.
Well, that's a lot of corporate talkfor a girl who's grown up
with partnership tax as her favorite,you know, part of the code.
(25:33):
So, Howard, can we move on to,you know, flow-through
entities, partnerships, S-corporations,that kind of thing?
And maybe how OB3 affects them?
Yeah, a couple things to consider
with flow-through entities,especially on the sell side.
One is with TCJA
(25:53):
we got the $10,000 SALT cap.
What statesimmediately did for pass-through entities
was develop alternate tax systemswhere the pass-through entity,
the partnership, or the S-corporation
pays the tax on behalf of the owners.
It is styled
(26:15):
and approved through an IRS noticethat is of questionable technical merit,
but nevertheless blessed by notice 2020-75
that basically says when you
have these alternate tax regimes,
you can have the businesspay the tax on behalf of the individuals.
(26:37):
It's treated as a business tax deduction,
not an itemized taxdeduction of the individual.
And it gets you around the deductionlimitations of the itemized deductions.
And in certain situationsmay get you around
some of the alternative minimum tax issuesas well that you have with these.
There was a lot of talkas the legislation progressed
(26:59):
as to whether these pass-through entitytax benefits would be curtailed
or eliminated,or only allowed for certain businesses.
Through the negotiation processthat they went through
to get the deal done,these were maintained.
The good news is they were maintained.
Where it getsinteresting is how you use them.
(27:23):
If you
start with the assumptionthat Todd and I own,
50-50, an S-Corp
and we're going to sell our S-Corporation
stock to Devin for cash.
If we sell our S-Corporationstock to Devin for cash,
(27:44):
that's viewedas a sale of the stock of the company
rather than businessincome of the company.
And for the most part,there's a few states
who interpret this differentlyfor the most part, you won’t be able
to use your state and local tax workaroundon that transaction because that's going
(28:05):
to hit your individual return,not the face of the business return.
So the immediate thought would be, well,geez, Todd
and I should have the company sellits assets to Devin
and then liquidate.
And if we do that,then that would get us into
it being
(28:26):
business income of the S-corporationor of the partnership,
as the case may be, and would be ableto use the state workarounds.
If you just stop there,that's a great answer
because you can get a full statetax deduction.
The problem you run into in S-Corps,
and to a lesser extent with a partnership,you maybe
(28:49):
have the same problem with a partnership
whether you sell interests or assets.
When you sell the assets
of the business,you have the potential for taking
what would have been capital gainand turning it into ordinary income.
That would be subject to the 37% tax rate,
(29:10):
rather than the 20% capital gains rates.
So at first blush, you would say,I would always want to have the business
entity sell assets to take advantageof the pass-through entity tax.
And the buyer may like thatbecause they get their step up.
The flip side isyou may end up with more ordinary income.
And if your buyer’s not giving youa gross up, you may cost yourselves
(29:32):
more in ordinary incomethan you save yourselves in state taxes.
It's just added complexityto how you go about disposing
of your pass-through entity.
Todd, I think we've all been through
a myriad of variationson that calculation, but
selling the business entity versus sellingthe assets definitely has an impact
(29:52):
on the pass-through entity taxesand the ability to take it.
Yeah, absolutely.
And it all comes down to modeling, right?
I mean, yeah don’t you think?
Yeah.
You know, there are some states now
that will treat the sale of the interestas a sale of the underlying assets
in an attemptto impose the tax on out-of-state folks.
So that comes into play as well.
(30:12):
There's another provisionthat was put out there
in TCJA in 2017that was supposed to expire in ‘25.
Then it was supposed to expire in ’28or after ‘25.
Then it was supposed to expirein ‘28 or ’29.
And now it's been made permanent.
Section 461 L.
(30:32):
And what it says is, as an individual,you can't deduct
trade or business lossesin excess of $600,000.
After that,it becomes a net operating loss
deduction that's deductiblein the next taxable year.
So for example,if I put $10 million into a business
(30:53):
and I'm active in the business and in yearone, I get a K-1 from a partnership
or an S-Corp that says I lost$5.6 million, I get to deduct
$600,000, and
$500,000 becomes a net operating loss
deductible in the next year,subject to the 80% limits.
(31:15):
So that's just an example in generalas to how these limitations work.
When you are disposingof a pass-through entity,
there's a myriad of problemsthat can come into play
with the interplay of this 461 L rule,
and with the disposition of an interest.
Say I've got that samepass-through entity,
(31:36):
and I've continued to have losses,and now I've got a loss
that's been suspended in excessbecause of basis limitations.
When I sell my pass-through entityat a gain
that's generally going to free upthe suspended losses.
If the partnership or S-Corp
is selling its interest,I'm sorry, selling its assets,
(32:00):
that's going to be trade or businessincome, that frees up these losses.
So, say I've got a suspended loss carryforward of $1 million.
The partnership or S-Corp sellsits assets at a gain of $10 million.
I'll generally be viewed as having
trade or business income of $9
million, the $10 million of gain
(32:22):
from the sale, offsetby the $1 million loss carry-forward.
And I'll go on my wayand I won't have any limitations.
If, instead, what happens isI sell the stock of the S-Corp,
you've got to, and record the gain
that way,you've got a fundamental question as to
whether or not the sale of the S-Corpand potentially the sale of a partnership
(32:44):
as well, gives rise to what's definedas trade or business income,
that allows you to free up
the trade or business lossthat's carried forward.
It could be something carried forward
because of basis limitationsthat frees up.
It could be something carried forwardbecause of the interest expense
carry-forward rules upon salethat frees up
(33:06):
a lot of different situationswhere this can come into play.
Therehasn't been any guidance on this yet.
We hope to get some at some point,
but selling your partnershipor S-Corp interest with freed-up suspended
losses can be an unwelcome surprise,or at least add a lot of risk to
positions you take on a sale.
(33:27):
So that's just something to watch out foron the exits from pass-through entities.
We thought this problemwould eventually go away,
but now the provisionhas been made permanent.
And here we are.
So, all good things.
Those are, you know, five of what we seeas some of the most important
considerations from OBBBA when we'retalking about M&A transactions.
(33:49):
So a big, bigthank you to Howard and Todd here.
Our dynamic duo.
We hope to have you back hereon the show soon.
And thank you for your time today.
Thank you both.
Iris,it seems like there is a reoccurring theme
across episodes here,and that is one of modeling
For sure.
(34:09):
I think we heard, you know, Mike Cornett,who was on the show, what,
two episodes ago,Devin, talk about modeling.
And in this, you know,in the realm of international tax.
And here we are again with M&A.
So, just wanted to call outthat here at Forvis Mazars we actually do
have some new modeling service offeringswithin relation to OBBBA,
(34:33):
and if you're interested in that,whether it be because, international tax
considerations, you have a transactionor just looking at your year-end
tax provisions, reach out to us,you can get us on our website
or the WashingtonNational Tax Office website as well.
And we'd be happy to connect youwith the right folks.
So thanks for that.
(35:00):
Each episode will bring you what we calla Focused FORsight of the week,
an article or recordingthat might be of interest to you.
This week's FocusedFORsight is an article titled
Beginning of ConstructionNotice 2025-42, Solar and Wind Facilities.
Now, you may rememberfrom previous episodes that we've talked
about President Trump's executive orderfor Treasury to issue guidance
(35:22):
about beginning of construction dateswith relation to solar and wind projects.
The resulting notice has just come out,and we take a look into it
in this FORsight.
So you can always access our FORsightson the Washington National Tax
Office websiteor at the Forvis Mazars U.S.
website more broadly.
And that's our show. Thanks for joining.
(35:43):
Remember to subscribe and listenfor the next episode of our podcast.
Until next time.
The information set forth in this podcastcontains
the analysis and conclusionsof the panelists based upon his, her,
or their research and analysis of industryinformation and legal authorities.
Such analysis and conclusionsshould not be deemed
(36:03):
opinions or conclusions by Forvis Mazarsor the panelists
as to any individual situationas situations are fact-specific.
The listener should performtheir own analysis and form
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