INSIGHT

Tax due diligence: What you need to know for successful mergers 

Craig Hamm, Bob Houston • February 6, 2025

Services: M&A Tax Services, Due Diligence

---

The complex landscape of mergers and acquisitions demands careful attention to tax implications that can make or break a deal. With U.S. M&A transactions projected to surge in 2025, understanding tax due diligence has never been more critical for businesses considering strategic moves.  

What is tax due diligence? 

Tax due diligence involves a comprehensive review of a target company’s tax position, potential liabilities and opportunities during an M&A transaction. This process helps identify any tax-related risks, outstanding obligations and areas where tax efficiency can be improved. Both buyers and sellers benefit from this crucial step — buyers gain clarity on potential tax exposure, while sellers can address issues proactively before they impact negotiations. 

“Tax due diligence serves as a critical lens through which we discover and quantify potential tax risks in M&A transactions. These findings often impact the deal structure, escrow holdbacks, indemnification, and determine what conditions are needed to resolve tax issues.” – Bob Houston, Tax and M&A Leader 

Key components of the tax due diligence process 

The tax due diligence process typically spans one to three months, though complex deals may require up to six months. Three essential phases drive the investigation: 

Information gathering 

Teams collect and analyze tax returns from the past three years, sales and use tax returns, payroll reports, property tax filings, unclaimed property reports, financial statements, income tax provisions and relevant trust documents. This documentation provides the foundation for understanding the target company’s tax position. Special attention goes to filing timelines, positions taken on returns and any aggressive stances that might trigger audits. 

Management interviews 

Tax professionals conduct detailed discussions with the target company’s leadership to clarify questions arising from document review and gain deeper insights into tax planning strategies. These conversations often reveal crucial context about historical decisions and future tax implications. 

Analysis and quantification 

The team evaluates all collected information to determine potential tax exposure and opportunities. This includes reviewing claimed deductions, tax credits and compliance with reporting requirements. They assess documentation supporting tax positions, particularly for specialized items like R&D credits or complex deductions. 

Common findings and solutions 

During tax due diligence, teams frequently uncover issues such as incorrectly deducted expenses, questionable tax credit claims or documentation gaps. Common challenges include: 

• Misclassification of capital improvements as expenses 
• Inadequate support for claimed tax credits 
• Missing or incomplete documentation for deductions 
• Inconsistencies in state and local tax compliance 
• Sales and use tax exposure 
• Misclassification of employees as independent contractors 
• International tax exposure in cross-border transactions 
• When problems arise, buyers have several options: 
• Negotiate purchase price adjustments 
• Include indemnification clauses in agreements 
• Structure the deal to minimize tax risk exposure 
• Develop remediation plans for post-closing implementation

Impact on deal structure 

Tax due diligence findings often influence the final deal structure. For stock purchases, buyers may need additional protection through representations and warranties, while asset purchases might require specific allocation strategies to optimize tax treatment.  

Understanding these implications early in the process allows both parties to negotiate more effectively and avoid surprises late in the transaction. 

The value of professional guidance during tax due diligence 

While some companies consider handling tax due diligence internally, most recognize the advantages of working with specialized M&A professionals. External teams bring independence, confidentiality and focused attention to the process without disrupting internal operations. Professional guidance helps companies navigate complex tax regulations, identify potential savings opportunities and minimize risk exposure throughout the transaction. 

BPM’s role in successful transactions 

For businesses navigating the complexities of tax due diligence, BPM delivers comprehensive solutions that protect your interests throughout the M&A process. Our dedicated team combines deep technical knowledge with practical experience across various industries and transaction types. By partnering with BPM, you gain access to professionals who understand both the technical aspects of tax due diligence and the strategic implications for your business objectives. 

To ensure your next transaction benefits from thorough tax due diligence that identifies risks, uncovers opportunities and supports optimal deal outcomes, contact us.