Boost technology and life science transaction values with tax planning

Proactive tax planning ahead of your technology or life science company’s transaction can help enhance investor value by addressing complex issues and improving outcomes.

Strategically prepare for transactions within these industries by exploring the following actions and their possible benefits:

• Negotiate value for net operating losses and research credits
• Protect incentives to employees
• Provide an increased after-tax value to investors through gain exclusion
• Reduce tax impact with transaction costs

Transaction planning overview

With large investments required upfront for R&D, companies often look toward a transaction whether that be a significant round of financing, or an exit through sale or initial public offering (IPO). There are several tax issues that can catch you unaware in a transaction if these considerations aren’t planned for ahead of time.

Alternatively, effective tax planning can help provide additional value to investors. While effective tax due diligence and tax structuring can help a company upon a transaction, there are also several other common but complex tax issues that can affect the transaction.

Negotiate value for net operating losses and research credits

Due to the upfront investment in R&D, technology and life science companies often accumulate a large amount of tax attributes, such as net operating losses (NOLs) and research credits that carry forward and can potentially offset tax once taxable income is generated. Often, these companies don’t generate taxable income to realize this benefit until after a transaction or large financing round.

When this happens, these attributes may be limited by Internal Revenue Code (IRC) Sections 382 and 383, which limit the amount of attributes that can be used to offset taxable income or tax after an ownership change — generally, a greater than 50% shift in ownership, though the rules are complex.

When there are multiple ownership changes (for example, the result of multiple preferred financing rounds), it can create pools of attributes that are subject to different limitations, and the smallest limitation will apply.