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M&A deal implications of 2025 tax legislation

January 27, 2025 / 10 min read

Uncertainty about the future of tax legislation has made M&A-related negotiations and structures more complicated. Despite not having clarity about the contents of future legislation, there are still ways for buyers and sellers to meet their respective goals.

Federal tax rules have been the subject of significant changes and proposals in recent years. This cycle began in 2017 with the enactment of the Tax Cuts and Jobs Act (TCJA). The TCJA overhauled much of the Tax Code by providing permanent tax cuts to corporations, temporary tax cuts to individuals with business income, and both broadening and restricting deductions for interest, depreciation, and research expenses. The intervening years included a number of temporary tax changes that provided support to businesses and individuals throughout the COVID-19 pandemic. Many other tax changes were proposed as the control of the presidency, and Congress has oscillated between Republican and Democratic control.

The actual tax changes and the continued uncertainty about the looming expiration of the temporary proposals has made M&A-related negotiations and structures more complicated. Despite not having clarity about the contents of future legislation, there are still ways that both buyers and sellers can react to meet their respective goals.

How might tax uncertainty impact deal flow?

The potential for increased tax rates has been the most significant tax factor impacting deal flow. Specifically, proposals to increase tax rates on ordinary income and capital gain for high-income individuals, expand the net investment income tax to additional types of income, restrict planning around various estate and gift tax savings vehicles, and implement various forms of wealth taxes have generated considerable attention. All of those proposals would’ve been particularly expensive for business owners and created considerable uncertainty. Such factors caused some business owners to want to exit quickly before any of these types of tax changes occurred. But most of those business owners have already exited, and those who weren’t ready to sell immediately sat on the sidelines because it seemed like it might get too expensive to sell by the time they would’ve been ready.

However, most of these tax proposals were primarily championed by Democrats in Congress and the Biden administration. With President Trump now in office and Republicans controlling both chambers of Congress, the likelihood of these proposals being enacted in the next four years is quite low. This may loosen up the M&A market by causing more sellers to come to the table since they’ll have more comfort that after-tax proceeds expectations won’t be unexpectedly decimated as they progress toward a deal. However, lingering uncertainty on the specifics of any tax law changes during 2025 or later could still cause some hesitation on closing a deal until any tax changes become known.

What do we know now about 2025 and beyond?

The general contours of the outlook on future tax changes are starting to come into view. We know the expiration dates for tax rules based on existing law, which would largely involve tax increases starting in 2026 that will be particularly expensive for individuals with business income. We know that unified government — Republican majorities in Congress and a second Trump administration — sets the stage for extension of tax cuts and consideration of additional tax changes. Although we also know that choices will likely be necessary, including potential revenue raising tax provisions, to manage the overall cost of tax legislation given the significant increase in the national debt compared to when the TCJA was enacted in 2017. Finally, we know that Congress will almost certainly complete tax legislation during 2025 to provide certainty before the expiration of any temporary TCJA provisions occur.

Beyond those known factors, there are many questions about the specifics of what will be included in legislation and when it will occur. Even for provisions that have a high likelihood of being included, there are still unknowns surrounding whether those provisions might end up looking different in response to policy and budgetary considerations. Even with uncertainty, there are still deal structuring techniques available to best manage the tax results of a deal.

Key questions for transaction negotiations

There are several themes to consider in navigating deal structures considering future tax law uncertainty:

Effective dates add complexity

Effective dates are key aspects of tax legislation since they dictate when and how taxpayers will face the impact of any resulting rules. In simple terms, Congress could choose to make rules apply retroactively, currently, or prospectively. Often, a variety of effective dates will be applied in a legislative package. For example, the TCJA included a Sept. 27, 2017, effective date for 100% bonus depreciation, while other aspects of that law took effect at the beginning of 2018 and others were deferred until 2022 and 2026.

During 2025, Congress may or may not apply retroactivity given the fact that core aspects of the TCJA don’t expire until the end of that year. Thus, a choice could be made to have all aspects of the new legislation apply prospectively. However, it’s possible that at least some aspects of tax legislation will have retroactive effect to either the beginning of 2025 or some interim date during the year (e.g., the date that legislation is introduced in Congress). In recent years, proposals to restore tax deductions related to Section 174, Section 163(j), and bonus depreciation have been proposed to be retroactive back to 2022.

The possibility of retroactive effective dates necessitates specific actions in deal negotiations. For example, if a seller is responsible for pre-closing tax liabilities and refunds, then a retroactive law change may provide for a significant tax savings to the seller. In some structures, this savings may come at the detriment of the buyer. If the buyer was counting on the tax attributes that the seller is now able to claim, that issue may need to be addressed in the negotiations to ensure that economics are appropriately navigated. 

Other considerations

While uncertainty surrounding taxes is a significant element of M&A in early 2025, there are other significant policy decisions that the new Trump administration and Congress will be making that could have a significant impact on a target’s business. Several of the more prominent are the potential for significant increase in tariffs, changes in the regulatory environment, and other policy actions. Tariff increases and regulatory changes could either help or hurt a business depending on which side of the transaction that business is on. Broader policy decisions could make waves across a number of industries. For example, if Inflation Reduction Act energy-related credits are pared back or significant changes are made to healthcare reimbursements of Medicare, businesses related to these industries could see a significant decrease in revenue.

What to do now?

In many cases, tax uncertainty can be managed in the deal process through a multistep process. This includes identification of the potential tax items that could impact a deal, modeling the possible results, and deciding on how to best negotiate those items. This can seem overwhelming when so much remains subject to negotiation in Congress. However, approaching these concepts early in the deal process can make it much more manageable. Tax matters are often addressed toward the end of a deal once it has been concluded that a deal is highly likely to happen. Unfortunately, this ordering may not be viable for many transactions in the foreseeable future as tax matters become one of the variables that can impact the viability of a deal. 

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