Navigating Changes to US Tax Code What Business Leaders Can Do to Remain Agile

Robena Jafari is a partner and deputy leader of Citrin Cooperman’s tax services. Her key responsibilities include supporting operational leadership, management of the firm’s tax practice, in addition to the development and implementation of tax strategy to drive digital optimization, organizational growth, and enterprise value.

Nichol Chiarella is a partner and Citrin Cooperman's Mergers and Acquisitions Tax Practice Leader, with over two decades of experience in public accounting. She provides high level tax planning and consulting services related to buy-side, sell-side, and restructuring transactions involving private equity firms, closely held businesses, business owners, and high net worth individuals within the technology, manufacturing and distribution, wholesale, retail, cannabis, healthcare, real estate, staffing, and professional services industries.

Jafari: Nichol, it’s been a challenging year with many pending changes to U.S. tax code. How are you and your team navigating these murky waters and what are some of the commonalities you see with your clients?

Chiarella: I always think it's really fun being a tax practitioner during a year where there's pending legislation that proposes significant changes to the tax code. The flip side of that could be that there's a mix of anticipation and concern among not only the tax community, but also our clients. So, it makes sense that during 2025, mergers and acquisitions (M&A) activity has been rebounding across all sectors, but not without a bit of caution and selectivity. And so, we're seeing more structured deals on the buy-side.

What that looks like is buyers are using earnouts, seller financing, and rollover equity to bridge the gap in valuation, and PE sponsors are getting creative by using minority stakes, non-controlling investments, and even SBA loans to deploy capital. International buyers are treading very carefully due to the cross-border deals, facing increased tax burden under Pillar 2, tariff volatility, and just overall geopolitical risk. Some tax attribute value plays that we're seeing are buyers seeking targets that have materially valuable attributes such as net operating losses, interest expense carryovers, and R&D credits that can create value today. Private equity sponsors are getting creative by using minority stakes, non- controlling investments, and even SBA loans to deploy capital.

Then there's really this interest in strategic buyers. We're seeing more owners gravitating towards strategic buyers that have synergistic benefits. Technology also plays a huge role in allowing for accelerated digital transformation and value premiums for those tech enabled targets, especially where we have employees continuing after a transaction or real care for the continuation of the culture of that business.

We're also seeing more and more extended pre-market preparation. Sellers in the middle market are now actually investing 6 to 12, even more, months ahead of a transaction making sure that their financials are cleaned up or due diligence and working capital.

Making sure that they've done some financial cleanup or due diligence and working capital normalization focuses as well as tax due diligence to drive that valuation but also expedite the deal cycle once they are ready to go to market.

My personal favorite is that we're seeing so much more tax planning in advance where sellers are evaluating what their structure is, which provides for more flexibility in arriving at a tax-efficient exit strategy. Qualified small business stock eligibility is one example, and taking advantage of the federal PTET deduction which is available in over 36 states is another. Taking into consideration whether there are intercompany arrangements or equity comp arrangements or even non-binding arrangements that could result in some unintended tax consequences early on can also help with a smoother process when it comes time to sell.

We're seeing so much of this right now in M&A — the difference in a stock versus an asset deal being more meaningful than ever because of the pass-through entity tax regime. In the middle market, we're dealing with pass through entities all the time and it used to be that stock deal versus asset deal, hands down, was a better net walk away for that seller. Now what we're seeing is that it depends on what state they operate in and where the shareholders sit. What is their apportionment? Getting involved nice and early and modeling out what an asset sale looks like, and what a stock sale looks like, and making sure the appropriate language is in that letter of intent for flexibility because we just don't know what's going to be beneficial until we put pen to paper and model it out.

Jafari: Qualified small business stock is top of mind for many businesses right now. How are you helping clients in this regard?

Chiarella: Right now, pretty much a week does not go by without me getting a question on qualified small business stock. It’s a great opportunity for excluding up to 10 million dollars of gain (now 15 million dollars of gain) or 10 times the basis, whichever is greater. Whether it's a buyer looking to structure a transaction or a seller looking to exit, they want to know, “How can I maximize qualified small business stock? Can I utilize it? Do I qualify?” Something we like to do nice and early is a qualified small business stock analysis to figure out if they qualify.

Jafari: What are some of the unique ways your team is approaching these issues for your clients?

Chiarella: What we focus most on providing to clients, especially on the sell-side, is pre-transaction tax planning and structuring. So again, what's my existing structure on the sell-side? It can be five years out, or it can even be at the point of formation. There's no such thing as getting us involved too early, but there is such a thing as getting us involved too late. The earlier we're involved, the more flexibility there is in what we can do for that client that will be respected by the IRS. Likewise, on the buy-side what kind of acquisition vehicle do we want to use that allows the maximum tax benefits post-transaction?

Our latest offering for clients is what we call our market readiness assessment. What it shows a client is whether they are ready to go to market based on a very high level interview about various areas of tax, such as the financials they filed their tax returns with, in which states they have filed tax returns and the formation documents and agreements that are written, or perhaps unwritten, between shareholders and employees, to name a few. That's an ideal product to utilize about one to two years out from a transaction because the conclusion provided in the report provides that client with substantive information about any potential areas of deficiency while they still have time to take any corrective measures they may need before they get in front of a potential buyer.

When we're looking at a deal structure, we're working alongside those attorneys, the investment banker, pre-LOI, pre-term sheet if we can so that we're modeling out what it looks like for a seller. What's the best way I can structure this transaction so the seller walks away with the greatest tax benefits post deal? Then making sure that the appropriate language is in those letters of intent, in that term sheet so that their economic intentions align with the tax language.

Post-closing we always tell clients, “You're not done with us yet!” We're likely going to be working alongside their other professionals and post-closing, we're oftentimes supporting the tax compliance process all the way through what could be nine to twelve months later when the tax reporting has to get done to make sure that the appropriate and intended tax treatment is properly reported on the returns.

To learn more about how Citrin Cooperman’s dedicated Mergers and Acquisitions Tax Practice can help your business successfully navigate a rapidly evolving market, please contact Nichol Chiarella or info@citrincooperman.com.