Professional fees from bankers, attorneys, accountants and other transaction-related advisors incurred during a takeover or buyout are often substantial. The default rule by the Internal Revenue Service (IRS) assumes that professional service fees related to an acquisition produce significant future benefits and should be capitalized. This means that these costs are amortized over lengthy periods for asset acquisitions, or even worse for stock acquisitions, permanently capitalized into the basis of the stock.

A Transaction Cost Analysis (TCA) identifies professional service fees that are not facilitative to the transaction, such as those for defining acquisition objectives, conducting preliminary financial analysis and due diligence, arranging for borrowing, or integrating the acquired company. These fees can either be deducted immediately or amortized.

As a strategic service of BMF’s Transaction Advisory Services Group, a Transaction Cost Analysis helps buyers and sellers identify and evaluate the implications of transaction costs. Using our structured approach, we can help your company recognize the most favorable Federal income tax treatment of otherwise non-deductible transaction costs.

Our Transaction Cost Analysis methodology has three phases:

Phase I

Transaction Review and Documentation Gathering

  • Review the transaction in detail, which includes discussing the deal with relevant personnel as well as reviewing board minutes, investment banking presentations, closing documents, and other relevant transaction-related documents.
  • Identify the various transaction-related service providers and examine the professional service fees incurred.
  • Contact service providers to obtain representation letters, invoices, and other pertinent information detailing and explaining the nature of services performed to support the tax treatment of professional fees.

 

Phase II

Analysis and Documentation

  • Gather, review, summarize, and document relevant invoices, engagement letters, closing documents, and other transaction-related documents.
  • Reconcile invoices to the general ledger to help ensure completeness and to provide an audit trail from the tax return to the general ledger.
  • Assist professional service providers to complete the representation letters that we use to support the tax treatment of transaction-related fees.
  • Draft a technical and procedures memo that details the transaction, describes the professional service fees, provides the relevant rules and regulations, and analyzes the fees to the relevant rules.

 

Phase III

Analysis and Project Delivery

  • Provide a complete IRS-ready deliverable for the transaction that includes the technical and procedures memo, all relevant invoices and other documents, and summary sheets detailing the tax treatment of the transaction costs.
  • Discuss the deliverable and final results with your personnel.

 

Practice Leaders

Mark B. Bober

Partner & Practice Leader

James M. Bowen

Partner

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