![]() ![]() Typically, the largest fees associated with a transaction are the success-based investment banking fees, finder’s fees and private equity sponsor fees. To the extent that such costs can be allocated to debt financing, the costs will be amortized over a shorter period, with the balance written off upon repayment, which can often provide enhanced value for a financial buyer upon exiting an investment. For instance, often in the case of a financial buyer, there is no existing business and the acquisition costs allocated to the pre-BLD are treated as amortizable over 15 years. Operational diligence or industry analysis feesīy performing a transaction cost analysis, all of the transaction costs can be reviewed and analyzed to ensure that the taxpayer receives the benefits to which it is entitled. Legal (diligence, purchase agreement, financing, employment and benefits) feesĪccounting (financial and tax diligence) fees The following are typical transaction costs incurred by a buyer: ![]() Post-bright line date and inherently facilitative costs: Costs incurred post-BLD and certain inherently facilitative costs (e.g., securing an appraisal, structuring the transaction, obtaining shareholder approval, and preparing and reviewing documentation to effectuate the transaction) are treated as capital. Such costs may be treated as deductible business expansion costs if the acquirer is a pre-existing entity, or as start-up costs amortizable over 15 years if the entity is newly formed. The BLD usually coincides with the date the buyer enters into a letter of intent. Pre-bright line date costs: Costs incurred prior to the bright line date (BLD), generally referred to as the date on which the taxpayer and target decide to move forward with the transaction, are not treated as facilitative. Below are the general categories for the treatment of transaction costs:ĭebt financing costs: Costs incurred in connection with obtaining debt financing, including reviewing and negotiating the terms of the financing, are amortized over the life of the debt.Ĭompensation and benefits costs: Costs incurred in connection with employee compensation, including drafting and negotiating the employment and option agreements, are currently deductible. Furthermore, the regulations contain other simplifying conventions and special rules that apply to debt financing costs and compensation and benefits costs. However, for certain acquisitive “covered transactions” (defined in Treasury Regulation Section 1.263(a)-5(f)), a portion of the costs may be treated as non-facilitative of the transaction and, depending on the facts, such costs would be currently deductible or amortizable. Without any analysis, the general presumption is that all transaction costs are facilitative of the transaction and, depending upon the type of transaction, must be capitalized into the value of the stock or assets. Recently issued administrative guidance has cleared up some of the uncertainties, but also has added a few new ones to the mix for the buyer.īackground: Tax Treatment of Buyer Transaction Costs The treatment of success-based fees is a factually intense issue that has been full of uncertainties, especially with respect to the appropriate documentation. In most cases, a substantial portion of these costs are success-based fees contingent upon closing. In the typical corporate or private equity transaction, both the buyer and seller incur significant service provider costs, often in the millions or tens of millions of dollars, in connection with the closing of a transaction. Structured Finance & Capital Equipment Valuation ![]() Portfolio Company Performance Improvement ![]() Merger, Acquisition & Divestiture Services ![]()
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