Using The R&D Tax Credit To Offset Capital Gains From A Merger or Acquisition

4 Minute Read
Posted by Randy Eickhoff on Apr 28, 2021 1:44:57 PM

Like almost everything else, the global pandemic had a significant impact on mergers and acquisitions over the last year. The onset of COVID-19 here in the U.S. slowed down mergers and acquisitions as investors paused amid the uncertainty and disruption. However, the halt soon morphed into action as investors seized the opportunity to purchase companies of every size during the prolonged economic turmoil. As markets rise and fall and macroeconomic headwinds present opportunities, this is likely to continue.

Mergers and Acquisitions Gaining Steady Momentum Since 2021

A recent article published in Forbes magazine outlined three reasons why mergers and acquisitions are on the rise in a post-COVID economy. High investment capital levels, sellers' motivation to minimize risk and sell, and unprecedented access to technology designed to get the deal done all come into play to create a perfect storm for buyers and sellers alike.

Research and Development Tax Credits Can Offset M&A Capital Gains

The steady increase in mergers and acquisitions has sellers proactively searching for ways to offset the sale's capital gains and minimize the overall tax burden.

Offset Capital Gains from Sale of a Business

There are several reasons why you might want to offset capital gains. Offsetting capital gains can help you minimize your tax liability and maximize your investment returns. So, it's something to consider if you're looking to reduce your tax burden, especially on a merger & acquisition.

Ways To Offset Capital Gains From A Merger Or Acquisition

  1. Capital losses can offset capital gains of the same type.
  2. Capital gains may be offset by Carryforward Capital Losses from earlier years
  3. Utilize tax-deferred exchanges to defer recognition of capital gain
  4. The installment sale method can also be used to spread out the recognition of capital gain over several years
  5. Make a charitable contribution of appreciated securities instead of selling them and incurring a capital gain
  6. Invest in a Qualified Opportunity Zone Fund to receive preferential tax treatment on capital gains reinvested in certain economically-distressed communities nationwide
  7. Purchase life insurance policy on key executives or shareholders to provide liquidity to offset capital gains taxes that would otherwise be due on the sale of business

How Do You Use R&D Credit To Offset Capital Gains?

A question that always comes up is how R&D tax credits can offset capital gains. The answer is not as simple as you might think. In short, R&D tax credits can offset tax (both regular and capital gains) generated by the same activities that generated the tax credits. As an example, if a taxpayer sells their business and has capital gains from the sale, R&D credits generated by that business could be used to offset the capital gains.

To learn more about how the R&D Credit works and how it can benefit your business, please contact a tax professional at Acena Consulting.

For many business owners, the research and development tax credit can provide a sound resource to resolve their capital gains concerns. Understanding the benefits of the R&D tax credit and some of the program's rules can help reduce the tax obligation for sellers who have recently received capital gains from their organization's sale.

What You Should Know About Using the R&D Tax Credit After Selling Your Organization

Are you wondering how you may be able to leverage R&D tax credits to offset the capital gains of a recent corporate sale? For many businesses, the best way to lower future tax obligations is to take a look back at past research and development activity that hadn't been claimed yet.

The limitation on going back into previous years changes by state (and may even change if an organization shows a loss). However, in some cases, it's possible to look back as many as four years to determine any lost opportunity for claiming the R&D tax credit and leverage that credit to offset the capital gains of the sale.

For example, here at Acena Consulting, we recently worked with a manufacturing company that was readying itself for sale. We were able to go back for the past four years to identify qualifying activities for the research and development tax credit. Going through the process allowed our client to claim the credits rather than miss out on them entirely.

The Benefit of Looking Back for Unclaimed Qualifying R&D Activities

Beyond offsetting capital gains, leveraging the R&D tax credit as part of the merger and acquisition process delivers other benefits as well. Looking back over previous years allows business owners to claim relevant credits before the company is dissolved. Additionally, identifying qualifying research and development activities helps make their business look as attractive as possible for buyers. Showing investors a validated history of research and development activities can help increase the business's perceived value.

Acena Consulting Can Help Establish Qualifying R&D Activity for Your Business

Acena Consulting helps businesses of every size and across every industry identify, document, and claim qualifying R&D tax credits. Schedule an appointment with our team today to learn more about our process.

Randy Eickhoff

Randy Eickhoff

Acena Consulting Founder and Partner. Randy is a licensed CPA and has worked with over 200 companies on various tax credits and other government incentives including multinational technology firms as well as small privately held manufacturing, sports, and technology companies.