• Sweeping tax changes enacted through the reconciliation bill include permanent TCJA cuts and major reforms to business, individual, and international tax rules. 

• Taxpayers should begin modeling changes now, especially for bonus depreciation, research expensing, Section 163(j), and Opportunity Zones, to identify planning windows. 

• A wide range of industries including manufacturing, real estate, energy, and financial services will be affected, with varying opportunities and risks across sectors 

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The president signed into law a sweeping reconciliation tax bill in a July 4 signing ceremony, capping a furious sprint to finish the legislation before the self-imposed holiday deadline. The Senate approved the bill in a 51-50 vote on July 1 after making a number of last-minute changes following intense bicameral negotiations. The House voted 218-214 on July 3 to send the bill to the president’s desk. 

Notable late changes to the version of the tax title released by the Senate Finance Committee on June 16 include: 

• Cutting Section 899 from the bill after reaching an agreement on Pillar Two with G-7 countries; 

• Significantly amending the provisions on global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the base erosion and anti-abuse tax (BEAT); 

• Modifying the energy credits provisions; 

• Removing the shutdown of state pass-through entity workarounds to the cap on deducting state and local tax (SALT); 

• Removing an unfavorable expansion of the loss limit under Section 461(l); 

• Reducing the new tax on remittances; 

• Changing the opportunity zone provisions; 

• Expanding to all residential construction an exception to the long-term contract rules; and  

• Removing a new excise tax on litigation financing. 

Also, President Donald Trump reportedly promised House conservatives that he would strictly enforce the beginning of construction rules for wind and solar projects and potentially make the permitting process more difficult. 

With the legislation now final, taxpayers should focus on assessing its impact and identifying planning opportunities and challenges. The bill offers both tax cuts and increases that would affect nearly all businesses and investors. The Joint Committee on Taxation (JCT) scored the bill as a net tax cut of $4.5 trillion over 10 years using traditional scoring. Under the current policy baseline the Senate used for purposes of the reconciliation rules, that cost drops to just $715 billion. The Senate scored the provisions against a baseline that assumes temporary provisions have already been extended, essentially wiping out the cost of extending the tax cuts in the Tax Cuts and Jobs Act (TCJA). 

The bill not only makes the TCJA tax cuts permanent but amends them in important ways. The legislation also offers a mix of favorable and unfavorable new provisions. Key aspects of the bill include: 

• Making 100% bonus depreciation permanent while temporarily adding production facilities;  

• Permanently restoring domestic research expensing with optional transition rules; 

• Permanently restoring amortization and depreciation to the calculation of adjusted taxable income (ATI) under Section 163(j) while shutting down interest capitalization planning; 

• Increasing the FDII effective rate while changing the deduction allocations and other rules;  

• Increasing the GILTI effective rate while changing the foreign tax credit (FTC) haircut and expense allocation rules;  

• Increasing the effective rate on BEAT; 

• Phasing out many Inflation Reduction Act energy credits early and imposing new sourcing restrictions;  

• Creating new deductions for overtime, tips, seniors, and auto loan interest; 

• Imposing a 1% excise tax on remittances;  

• Increasing filing thresholds for Forms 1099-K, 1099-NEC, and 1099-MISC; 

• Extending opportunity zones with modifications; 

• Increasing transfer tax exemption thresholds; and 

• Increasing the endowment tax to a top rate of 8%. 

Takeaway

Now that the legislation is final, taxpayers should assess its impact carefully and consider planning opportunities. Several key provisions offer different options for implementation. The effective dates will be important, and there may be time-sensitive planning considerations.  

The following offers a more detailed discussion of the provisions. For a comparison of the tax provisions to current law and the campaign platform see BDO’s table. Join BDO July 10 for a webcast discussing the bill and its impact. 

Business Provisions 

Bonus Depreciation 

The bill permanently restores 100% bonus depreciation for property acquired and placed in service after January 19, 2025.  

The legislation also creates a new elective 100% depreciation allowance under Section 168(n) for any portion of nonresidential real property that is considered “qualified production property.” The election is available if construction on the property begins after January 19, 2025, and before January 1, 2029, and the property is placed in service by the end of 2030. 

A qualified production activity includes the manufacturing of tangible personal property, agricultural production, chemical production, or refining. Qualified production property does not include any portion of building property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or other functions unrelated to qualified production activities.  

There is an exception from the original use requirement if acquired property was not used in a qualified production activity between January 1, 2021, and May 12, 2025. Special recapture rules apply if the property is disposed of within 10 years after it is placed in service.  

The bill also increases the Section 179 deduction to $2.5 million with a phaseout threshold of $4 million for property placed in service after 2024, with both thresholds indexed to inflation in future years. 

Takeaway 

Allowing producers, refiners, and manufacturers to fully expense buildings rather than depreciate them over 39 or 15 years offers a significant benefit. The definition of “production” will be important, and generally requires “a substantial transformation of the property comprising the product.” Taxpayers with buildings that house both qualified production activities and other administrative, office, or research functions will also likely need to perform an analysis to allocate costs between functions. 

Section 174 Research Expensing 

The bill permanently restores the expensing of domestic research costs for tax years beginning after December 31, 2024. The permanent expensing rules are created under new Section 174A, while Section 174 is retained and amended to provide for the continued 15-year amortization of foreign research costs. Software development is statutorily included in the definition of research for purposes of Section 174A. Taxpayers retain the option of electing to capitalize domestic research costs and amortize such amounts over either 10 years or the useful life of the research (with a 60-month minimum).  

The bill will generally require taxpayers to implement the new treatment with an automatic accounting method change on a cut-off basis, but it offers two alternative transition rules. Taxpayers can elect to claim any unamortized amounts incurred in calendar years 2022, 2023, and 2024 in either the first tax year beginning after 2024 or ratably over the first two tax years beginning after 2024. Separate transition rules are available for eligible small business taxpayers meeting the gross receipts test under Section 448 ($31 million in 2025) for the first tax year beginning after 2024, allowing those taxpayers to file amended returns to claim expensing for tax years before 2025. Retroactivity is not available to small business taxpayers that are tax shelters, such as pass-throughs that allocate more than 35% of their losses to limited partners or limited entrepreneurs. 

The bill also amends Section 280C to again require taxpayers to reduce their deduction for research costs under Section 174A by the amount of any research credit (or reduce their credit by an equivalent amount), effective for tax years beginning after 2024. Under changes made by the TCJA, taxpayers were generally required to reduce their Section 174 capital account only to the extent the research credit exceeded their current-year amortization deduction. For most taxpayers, that meant that the amortization deductions and research credits were both allowed in full.  

Takeaway 

The restoration of domestic research expensing is somewhat retroactive, and taxpayers will have several options for recognizing unused research amortization and for recovering future research costs. Businesses should consider modeling their options to identify beneficial strategies because the timing of deductions can affect other calculations, including those for Section 163(j), net operating losses, FDII, and GILTI. 

Section 163(j) Interest Deduction Limit  

The bill permanently restores the exclusion of amortization, depreciation, and depletion from the calculation of ATI for purposes of Section 163(j), which generally limits interest deductions to 30% of ATI. The change is effective for tax years beginning after 2024. 

The bill also makes two unfavorable changes effective for tax years beginning after 2025:  

• Excluding income from Subpart F and GILTI inclusions and excluding Section 78 gross-up from ATI; and 

• Including interest capitalized to other assets in the limit under Section 163(j), except interest capitalized to straddles under Section 263(g) or to specified production property under Section 263A(f).  

The business interest allowed as a deduction up to the Section 163(j) limit will come first from any capitalized interest. Any disallowed capitalized interest exceeding the cap will be incorporated into the Section 163(j) carryforward and will not be treated as capitalized in future years.   

Takeaway

The ability to again exclude amortization and depreciation from ATI will provide welcome relief for many taxpayers, but others will be negatively affected by the changes. The JCT score indicates that the revenue raised from shutting down capitalization planning and excluding new categories of income will save more than one-third of the $60 billion cost of reinstating the exclusion of depreciation and amortization. Taxpayers should model the impact and consider tax attribute and accounting method planning. Although the bill essentially shuts down interest capitalization planning for years beginning in 2026 or later, those strategies remain viable for the 2024 and 2025 tax years. The legislation does not claw back any interest capitalized to other assets in tax years beginning before 2026, even if the capitalized interest has not been fully recovered with the asset.  

Section 199A 

The bill makes permanent the deduction for pass-through income under Section 199A and favorably adjusts the phaseout of the deduction for taxpayers who do not meet the wage expense and capital investment requirements or who participate in a “specified trade or business.” The legislation also creates a minimum deduction of $400 for taxpayers with at least $1,000 of qualifying income.  

Opportunity Zones 

The bill makes permanent the qualified opportunity zone (QOZ) program and updates the rules for investments made after 2026. As in the current program, taxpayers can defer capital gain by investing in a qualified opportunity fund. For investments made after 2026, taxpayers will be required to recognize the deferred gain five years after the date of the investment but will get a 10% increase in basis. Taxpayers can still receive a full basis step up to fair market value (FMV) for property held 10 years, but the bill adds a rule freezing the basis step up at the FMV 30 years after the date of the investment.  

Current QOZ designations will expire early at the end of 2026. New zones will be designated in rolling 10-year designation periods under new criteria that are expected to shrink the number of qualifying zones. A new category of rural opportunity zones is created. The 10% basis increase is tripled to 30% for investments in rural opportunity zones and the threshold for establishing the substantial improvement of qualifying property would be lowered to 50%. 

Both qualified opportunity funds (QOFs) and qualified opportunity zone businesses (QOZBs) will be required to comply with substantial new reporting requirements. 

Takeaway

The bill does not extend the mandatory recognition date of December 31, 2026, for investment made before 2027, as many taxpayers had hoped. But the program’s extension preserves one of the most powerful tax incentives ever offered by lawmakers. The timing of capital gains transactions may be particularly important. Delaying a capital gain transaction could allow taxpayers to make a deferral election in 2027 and defer recognizing the gain until well after the current 2026 recognition date. On the other hand, QOZ designations are likely to change in 2027. Taxpayers planning investments in geographic areas that are unlikely to be redesignated may need to make the investments before the end of 2026. Existing QOFs and QOZBs should consider their long-term capital needs because it is not clear whether any “grandfathering” relief will allow additional qualified investments into funds operating in QOZs that are not redesignated. The new reporting rules will apply to both new and existing QOZs and QOZBs for tax years beginning after the date of enactment, and those entities will need to collect and report substantial new information that has never before been required. 

Qualified Small Business Stock 

The bill enhances the exclusion of gain for qualified small business (QSB) stock under Section 1202 issued after the date of enactment in the following ways: 

• In addition to the existing 100% exclusion for qualified stock held for five years, taxpayers can qualify for a 50% exclusion after three years and a 75% exclusion after four years;  

• The current limit on the exclusion (the greater of $10 million or 10 times basis) is increased to $15 million, indexed to inflation beginning in 2027; and 

• The limit on gross assets at the time stock is issued is increased from $50 million to $75 million, indexed to inflation beginning in 2027. 

Takeaway

QSB stock is a powerful tax planning tool that can essentially erase gain of up to 10 times the initial basis. The changes make the structure more accessible and increase the size of potential investments. The bill does not change the expansive qualification requirements under Section 1202, and taxpayers should understand the rules clearly and document compliance throughout the holding period. 

Section 162(m) 

The bill amends the aggregation rules for applying the $1 million limit on deducting the compensation of a public company’s covered employees under Section 162(m). The current rules identify covered employees separately for each public entity but calculate compensation subject to the limitation on a controlled group basis. The number of covered employees is set to expand by five for tax years beginning in 2027 or later, and there has been some question whether such employees can come from the entire controlled group or only the public entity. 

The bill creates a new aggregation rule for tax years beginning after 2025 for identifying who is a covered employee and the amount of compensation subject to the limit. The aggregation rules are based on a controlled group as defined under the qualified plan rules in Section 414. The proposal also provides rules for allocating the $1 million deduction among members of a controlled group.   

Takeaway

The provision will have unfavorable consequences for many companies, including requiring the full amount of compensation from a related partnership in the calculation (rather than a pro-rata amount based on ownership percentage). It is estimated to raise almost $16 billion.  

Form 1099 Reporting 

The bill amends Section 6050W to reinstate the 200 transaction and $20,000 threshold for reporting third-party payment network transactions on Form 1099-K. The American Rescue Plan Act of 2021 repealed that threshold and required reporting when aggregate payments exceeded $600, regardless of the number of transactions. The IRS offered transition relief delaying the implementation of the change for two years and then provided a $5,000 threshold for payments made in 2024 and a $2,500 threshold for payments made in 2025. The bill restores the old threshold retroactively so that reporting is required only if aggregate transactions exceeded 200 and aggregate payments exceeded $20,000.  

The bill also increases the threshold for reporting payments under Sections 6041 and 6041A on the respective Forms 1099-MISC and 1099-NEC from $600 to $2,000 in 2026, indexing that figure to inflation in future years. 

Remittance Tax 

The bill imposes a new 1% excise tax on remittances of cash, money orders, cashier’s checks, or other similar physical instruments, with an exception for transfers from most financial institution accounts or debit cards. 

Takeaway

The tax in the final version affects a much narrower set of payments than the original 5% tax proposed in the House and the 3.5% tax in earlier House and Senate drafts.  

Exception for Percentage of Completion Method 

The bill expands exceptions to the percentage of completion method under the long-term contract rules under Section 460. The exception for home builders is expanded to include all residential construction. Further, the exception from the uniform capitalization rules for home builders meeting the gross receipts threshold under Section 448(c) ($31 million in 2025) is expanded to include all residential construction, and the allowable construction period is extended from two years to three. 

Employee Retention Credit 

The legislation makes several changes to the employee retention credit (ERC), including: 

• Barring ERC refunds after the date of enactment for claims filed after January 31, 2024; 

• Extending the statute of limitations on ERC claims to six years; and 

• Increasing preparer and promoter penalties on ERC claims.  

Takeaway

The provision presumably will affect only refund claims that have not been paid by the IRS. The legislative language provides that no credit or refund “shall be allowed or made after the date of enactment” unless the claim was filed on or before January 31, 2024. The IRS had been slow to process claims – potentially in anticipation of this provision, which had been included in a failed 2024 tax extenders bill. The provision is now estimated to raise only $1.6 billion, much less than the $77 billion estimated under the 2024 version. The difference may be the result of refunds that have already been paid, although it remains unclear how fast the IRS is processing claims filed after January 31, 2024. 

International Provisions 

Foreign-Derived Intangible Income 

The bill makes significant reforms to FDII, including raising the effective rate while making the calculation of income more generous. 

The bill permanently lowers the Section 250 deduction from 37.5% to 33.34%, still well above the 21.875% deduction rate that would take effect without legislation. The change will increase the FDII effective rate from 13.125% to 14% (compared to 16.4% absent legislation).  

The bill also repeals the reduction in FDII for the deemed return on qualified business asset investment (QBAI) and provides that interest and research and experimental (R&E) costs are not allocated eligible income. The final version modifies a change from an earlier draft that would have narrowed the allocation of deductions only to those “directly related” to such income. The final bill provides that the calculation includes “properly allocable” deductions. 

The changes are effective for tax years beginning after 2025, aside from a new exclusion from FDII-eligible income that would take effect after June 16, 2025. The bill would exclude income or gain from the Section 367(d) disposition of intangible property or property subject to depreciation, amortization, or depletion. The final bill omits a provision from an earlier draft that would have also excluded specified passive income subject to the high-tax kickout. 

Takeaway

The changes could expand the value of the deduction for many taxpayers despite the effective rate increase, particularly for industries with significant fixed assets and R&E costs. Taxpayers should assess the changes for potential planning and arbitrage opportunities, given the change in rates and rules. There may be accounting methods opportunities that could increase the benefit in current and future years. 

Global Intangible Low-Taxed Income 

The bill increases the GILTI effective rate while making both favorable and unfavorable changes to the underlying calculation effective for tax years beginning after 2025.   

The Section 250 deduction for GILTI decreases from 50% to 40%, still higher than the 37.5% deduction rate that would take effect without legislation. The effective rate before the FTC haircut will increase from 10.5% to 12.6% (compared to 13.125% absent legislation). The bill will also reduce the FTC haircut under GILTI from 20% to 10%, resulting in an equivalent top effective rate of 14% (up from the current 13.125% rate and the 16.4% rate that would take effect without legislation). It also provides that 10% of taxes (compared to 20% absent legislation) previously associated with Section 951A taxed earning and profits are not treated as deemed paid for purposes of Section 78. 

The deemed return for QBAI is repealed, increasing the amount of income subject to the tax. The provision also changes the allocation of expenses to GILTI for FTC purposes so that it includes only the Section 250 deduction, taxes, and deductions “directly allocable” to tested income. It also specifically excludes interest and R&E costs.  

Takeaway

The changes are significant and could affect GILTI calculations in both favorable and unfavorable ways. The legislation does not provide a definition of “directly allocable,” and guidance may be important in this area. Taxpayers should assess the impact and consider FTC and other planning strategies.  

Base Erosion and Anti-Abuse Tax 

The bill increases the BEAT rate from 10% to 10.5% for tax years beginning after 2025, lower than both the 14% rate in the previous Senate draft and the 12.5% rate that would take effect without legislation. The legislation also repeals an unfavorable change to the BEAT scheduled to take effect in 2026 that would effectively require taxpayers to increase their liability by the sum of all income tax credits. The final bill omits several provisions from an earlier draft that would have changed the base erosion percentage, created a high-tax exclusion, and shut down interest capitalization planning.  

Takeaway 

The final version removed several favorable changes from an earlier draft but potentially still allows for planning that capitalizes interest to other assets. 

Reciprocal Tax for ‘Unfair Foreign Taxes’ 

The final bill omits proposed Section 899, which would have imposed retaliatory taxes on residents of that impose “unfair foreign taxes.” The provision was removed from the legislation after the Trump administration announced an agreement with the G-7 countries to “exempt” the U.S. from Pillar Two taxes. The G-7 released a statement saying that the countries are committed to working toward an agreement that would create a side-by-side system to fully exclude U.S.-parented groups from the undertaxed profits rule and income inclusion rule while ensuring that risks related to base erosion and a level playing field are addressed. The group also agreed to work toward compliance simplification and consider treating nonrefundable tax credits similarly to refundable tax credits. 

Takeaway

The ability of G-7 countries to drive broader agreements — and the details emerging from any such agreements — will be critical for U.S. multinationals. The current announcements are largely just statements of intent on a common goal. No countries outside the G-7 were party to the commitments, and there may be resistance from some OECD and EU countries.  

Other International Provisions 

The bill includes several other international provisions effective for tax years beginning after December 31, 2025, including: 

• Making permanent the controlled foreign corporation (CFC) look-through under Section 954(c)(6); 

• Restoring the exception from downward attribution rules under Section 958(b)(4) that was repealed under the TCJA while adding a narrower rule under Section 951B that is more closely aligned with the TCJA’s intent; 

• Amending the FTC rules to treat inventory produced in the U.S. and sold through foreign branches as foreign-source income, capped at 50%, likely only for branch category purposes; and 

• Amending the pro-rata rules under GILTI and Subpart F. 

Takeaway

The changes are generally favorable. The permanent extension of the CFC look-through rule under Section 954(c)(6) preserves an important exception for Subpart F income that is scheduled to sunset at the end of 2025. The restoration of Section 958(b)(4) could simplify reporting obligations for some taxpayers. However, Section 951B gives Treasury the authority to provide guidance on reporting for foreign-controlled U.S. shareholders. The inventory sourcing rule could result in additional foreign-source income for FTC purposes when compared to the current rule, which sources based on production activities. Finally, the pro-rata share rules will require a U.S. shareholder of a CFC to include its pro-rata share of Subpart F or GILTI income if it owned stock in the CFC at any time during the foreign corporation’s tax year in which it was a CFC. That provision removes the requirement that the U.S. shareholder own the CFC’s stock on the last day the foreign corporation was a CFC. The proposal provides Treasury with the authority to issue regulations allowing taxpayers to make a closing of the tax year election if there is a disposition of a CFC.  

Energy Provisions 

Consumer and Vehicle Credits 

The bill repeals the following credits with varying effective dates: 

• Previously owned clean vehicle credit under Section 25E repealed for vehicles acquired after September 30, 2025; 

• Clean vehicle credit under Section 30D repealed for vehicles acquired after September 30, 2025; 

• Commercial clean vehicle credit under Section 45W repealed for vehicles acquired after September 30, 2025; 

• Alternative fuel refueling property credit under Section 30C repealed for property placed in service after June 30, 2026; 

• Energy-efficient home improvement credit under Section 25C repealed for property placed in service after December 31, 2025; 

• Residential clean energy credit under Section 25D repealed for expenditures made after December 31, 2025; and 

• New energy-efficient home credit under Section 45L repealed for property acquired after June 30, 2026. 

Depreciation 

The bill repeals the five-year depreciable life of qualified energy property. The Section 179D deduction is repealed for construction beginning after June 30, 2026.  

Sections 48E and 45Y 

The bill will generally begin to phase out the production tax credit under Section 45Y and the investment tax credit under Section 48E for projects beginning construction after 2033 except for solar and wind projects. Wind and solar projects beginning more than 12 months after the date of enactment must be placed in service by the end of 2027. 

The bill also creates restrictions related to prohibited foreign entities, most significantly adding limits on receiving material assistance from a prohibited entity for facilities that begin construction after December 31, 2025. Material assistance is based on a cost ratio for sourcing eligible components. The bill also tightens domestic sourcing requirements under Section 48E.   

Takeaway 

The final language was softened with a last-minute amendment that allows some continued runway for wind and solar projects. The change angered some House conservatives, who blocked a final vote in the House for hours before reportedly extracting a promise from the administration that it would vigorously enforce the beginning of construction rules. Treasury may have limited ability to change the guidance in this area because the statute itself provides that the beginning of construction for some credit purposes shall be determined under rules similar to existing IRS notices. 

Section 45X 

The advanced manufacturing credit under Section 45X is repealed for wind energy components sold after 2027 but will otherwise be extended to allow a 75% credit for components sold in 2031, 50% for 2032, 25% for 2033, and fully repealed for 2034 or later. The credit is expanded to cover metallurgical coal. Material assistance rules for prohibited foreign entities apply. 

Section 45Z 

The bill extends the Section 45Z clean fuel production credit through 2031 while reinstating a stackable small agri-biodiesel credit under Section 40A. A new restriction under Section 45Z disallows a credit unless the feedstock is produced or grown in the U.S., Mexico, or Canada. The calculation of greenhouse gas emissions is amended to exclude indirect land use changes and new prohibited foreign entity rules are imposed. 

Other Energy Provisions  

The bill makes several other changes, including: 

• Repealing the clean hydrogen production credit under Section 45V for construction beginning after 2027, two years later than earlier versions of the bill would have provided; 

• Increasing the rates for carbon capture under Section 45Q for carbon sequestered as a tertiary injectant or for productive use to provide parity with the rates for permanent geologic storage (also adding foreign entity of concern restrictions); 

• Expanding the publicly traded partnership rules to allow income from carbon capture facilities nuclear energy, hydropower, geothermal energy, and the transportation or storage of sustainable aviation fuel or hydrogen; and 

• Adding new restrictions for foreign entities of concern for the nuclear production credit under Section 45U. 

Tax-Exempt Entities 

The bill replaces the 1.4% endowment tax rate with graduated brackets based on the size of the endowment per student up to a top rate of 8%. The tax applies only to universities with at least 3,000 students, up from 500.   

The bill also expands the excise tax on executive compensation exceeding $1 million to include all current employees, as well as former employees employed in tax years beginning after 2016. 

Takeaway 

The final version of the bill removed provisions that would have increased the excise tax on private foundations and resurrected the “parking tax,” which included the value of transportation in fringe benefits in unrelated business taxable income.  

Individual Provisions 

Deduction for Tip Income 

The bill creates an annual deduction of up to $25,000 for qualified tips reported on Forms W-2, 1099-K, 1099-NEC, or 4317 for tax years 2025 through 2028. The deduction is available without regard to whether a taxpayer itemized deductions but begins to phase out once modified adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers. 

For tips to be deductible, they must be paid voluntarily in an occupation that “traditionally and customarily” received tips before 2025, as provided by the Secretary. The business in which the tips are earned cannot be a specified trade or business under Section 199A, and self-employed taxpayers, independent contractors, and business owners face additional limitations.  

Employers will be required to report qualifying tips to employees on Form W-2. The provision applies only to income taxes and generally does not affect the employer’s FICA tip credit except to extend it to specified beauty services businesses.   

The bill gives Treasury several explicit grants of authority to provide regulations on specific issues. The IRS is required to adjust withholding tables and provide guidance within 90 days to define which occupations “traditionally and customarily” received tips in the past. The IRS will also need to provide rules for determining when a tip is voluntary.   

Takeaway 

The provision will affect employers in important ways. Hospitality companies will face new reporting requirements that depend on how the business and worker occupations are characterized. Further, an employee’s ability to deduct tips could also depend on employer policies, such as mandatory tips, service charges, or other amounts that are not determined solely by customers.  

Deduction for Overtime Pay 

The bill creates a permanent deduction of up to $12,500 (single) and $25,000 (joint) of qualified overtime compensation for tax years 2025 through 2028. The deduction is available without regard to whether a taxpayer itemized deductions but begins to phase out once modified adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers. 

Qualified overtime compensation is defined as compensation paid to an individual required under Section 7 of the Fair Labor Standards Act (FLSA). Employers must perform new information reporting to separately report overtime pay. 

Takeaway 

Determining whether compensation is qualified overtime pay will not be made using tax rules but will instead depend on the employer’s characterization of the pay under the FLSA. 

Auto Loan Interest Deduction 

The bill will create a permanent deduction of up to $10,000 of interest on a qualified passenger vehicle loan for tax years 2025 through 2028. The deduction begins to phase out once modified adjusted gross income exceeds $100,000 for single filers and $200,000 for joint filers.  

The vehicle must be manufactured primarily for use on public streets, roads, and highways, and its final assembly must occur in the U.S. The deduction does not apply to lease financing and the loan cannot be to finance fleet sales, purchase a commercial vehicle, purchase a salvage title, purchase a vehicle for scrap or parts, or be a personal cash loan secured by a vehicle previously purchased by the taxpayer. 

Takeaway

Auto loan financing companies will face additional reporting requirements and be required to furnish a return with specific information on loans. 

Personal Exemption for Seniors 

The bill provides a new $6,000 personal exemption for individuals aged 65 and above for tax years 2025 through 2028. The deduction phases out for taxpayers with modified adjusted gross income exceeding $150,000 for joint filers and $75,000 for all other taxpayers.  

Takeaway

The personal exemption is meant to fulfill Trump’s pledge to remove tax on Social Security payments, which is not allowable under reconciliation rules. The legislation does not affect payroll taxes on Social Security payments. 

Individual TCJA Extensions 

The bill largely makes the individual TCJA provisions permanent, although with some important modifications. The individual rate cuts and bracket adjustments are made permanent while providing an extra year of inflation adjustment for the lower brackets. The bill also makes permanent: 

• The repeal of general personal exemptions;  

• The limits on the deductions for mortgage interest (while adding mortgage insurance premiums as qualified interest), personal casualty losses, and moving expenses; 

• The repeal of miscellaneous itemized deduction (with an exception for some educator expenses); and 

• The exclusion for bicycle commuting reimbursements. 

The bill restores an itemized deduction for up to 90% wagering losses, capped at the amount of wagering income.  

The bill makes permanent the increased alternative minimum tax exemption and phaseout thresholds but would claw back inflation adjustments to the phaseout thresholds by resetting them to 2018 levels. The actual phaseout of the exemptions based on the amount of income exceeding the thresholds is slowed by half.  

The bill permanently repeals the Pease limitation on itemized deductions that the TCJA suspended through 2025, but it would create a new limit. The new provision would essentially cap the value of itemized deductions so that the maximum benefit achievable for the deductions is equivalent to offsetting income taxed at a top rate of 35% rather than offsetting income taxed at the higher individual marginal rate of 37%.  

The bill creates a 0.5% haircut on individual itemized charitable deductions but also adds a permanent charitable deduction for non-itemizers of up to $2,000 for joint filers and $1,000 for other taxpayers. 

SALT Cap 

The bill makes the SALT cap permanent while raising the threshold for five years and then reverting it to $10,000 in 2030. The cap is set at $40,000 for 2025 but phases down to $10,000 once income exceeds $500,000. Both thresholds will increase by 1% for each year through 2029.  

Takeaway

Earlier drafts of the bill would have shut down taxpayers’ ability to use pass-through entity tax regimes to circumvent the SALT cap; the final version eliminated those provisions.  

Transfer Taxes 

The bill permanently sets the lifetime exemptions for the gift, estate, and generation-skipping transfer taxes at $15 million for 2026 and indexes them for inflation thereafter. The change represents a modest increase from the exemptions under the TCJA, which were initially set at $10 million but reached $13.99 million in 2025 with inflation adjustments. 

Active Business Losses 

The legislation makes the active loss limit under Section 461(l) permanent but reverses recent inflation adjustments in the $250,000 threshold.  

Takeaway

The final bill struck an unfavorable provision in earlier drafts that would have required disallowed losses to remain in the Section 461(l) calculation in future years. Under the final bill, disallowed losses still become net operating losses in subsequent years and can offset other source of income.  

Other Provisions 

The bill contains a number of other meaningful tax changes, including: 

• Creating a 1% floor for charitable deductions for corporations by providing that a deduction is allowed only to the extent it exceeds 1% of taxable income (up to the current 10% cap) for tax years beginning after 2025; 

• Changing the explicit regulatory mandate for disguised sale rules under Section 707(a)(2) to clarify that the rules are self-executing without regulations, effective after the date of enactment; 

• Raising the percentage of allowable assets a real estate investment trust (REIT) may have in a qualified REIT subsidiary from 20% to 25% effective for tax years beginning after 2025; 

• Making permanent the increases to the low-income housing tax credit;  

• Increasing the Section 48D credit for semiconductor manufacturing facilities from 25% to 35% for property placed in service after 2025; 

• Making permanent the new markets tax credit; 

• Treating spaceports like airports for the private activity bond rules, effective for obligations issued after the date of enactment; 

• Increasing the limit on the “cover over” to Puerto Rico and the U.S. Virgin Islands for excise taxes on distilled spirits effective for imports after 2025; 

• Allowing the liability from gain on the sale of qualified farmland property to be paid in 10-year installments for sales after the date of enactment; and 

• Creating tax-preferred accounts for children, with a pilot program offering a $1,000 contributory credit for qualifying children for tax years beginning after 2025. 

Takeaway

The inclusion of the new markets tax credit and the CFC look-through rule, which are both scheduled to expire at the end of 2025, indicates that Republicans do not have much hope for another tax bill this year. House Ways and Means Committee Chair Jason Smith, R-Mo., originally left those provisions off the House bill, saying he hoped to address them in a bipartisan extenders bill. Republicans have also discussed moving a second reconciliation bill, although that may have been a negotiating ploy to appease members whose priorities are not addressed in this bill. 

Next Steps 

Taxpayers should assess the potential impact of major provisions when considering the tax efficiency of transactions and investments. There may be planning opportunities that should be considered now, such as accelerating or abandoning energy credit projects or investments and modeling the impact of changes to the limit on the interest deduction under Section 163(j), bonus depreciation, and research expensing under Section 174. Changes to opportunity zone rules could affect the timing for triggering capital gains and making investments. International changes may present arbitrage opportunities to capitalize on favorable changes or mitigate the impact of unfavorable changes. 

Written by Dustin Stamper. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

Navigating What’s Next: Industry-Specific Tax Strategies 

This reconciliation bill marks one of the most consequential shifts in tax policy in recent years —impacting businesses across nearly every sector. At MGO, we’re helping clients in manufacturing, real estate, financial services, energy, and emerging technology interpret the changes and respond with purpose.

From bonus depreciation and research expensing under Section 174 to the evolving rules around Section 163(j), Opportunity Zones, and global tax alignment, our professionals bring deep technical insight and practical industry knowledge to every engagement. Whether you’re modeling tax scenarios, rethinking compliance, or reevaluating deal timing, MGO’s team is ready to help. Contact us to learn more.  

The post Republicans Complete Sweeping Reconciliation Bill  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• U.S. doubled Section 232 tariffs on steel and aluminum, with major changes to how multiple tariffs are prioritized on imported goods. 

• Federal courts paused key IEEPA-related tariff rulings, creating uncertainty for businesses facing overlapping trade restrictions. 

• Importers should assess duty exposure, monitor Section 301 exclusions, and evaluate mitigation strategies for evolving tariff risks. 

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In three recent related developments, the landscape of the current tariffs under various statutes changed significantly: 

• The tariffs on steel and aluminum products are doubled; 

• A federal judge in Washington, D.C. granted the government’s request to pause a decision in a tariff-related case; and  

• The United States Trade Representative (USTR) announced a three-month extension of exclusions in the Section 301 investigation of China. 

Doubling of the Steel and Aluminum Tariffs 

First announced in March of 2018 and then expanded in February 2025, the revised tariffs of 25% on steel and aluminum imports have been in effect since March 12 (for prior coverage, see the trade alert dated February 13, 2025 and the trade alert dated March 17, 2025). President Trump announced the 50% tariff rate hike on May 30, citing the need to protect the U.S. steel and aluminum industries.  

President Trump issued a Proclamation on June 3, 2025 ordering that the Section 232 “national security” tariffs on imports of steel and aluminum products be increased from 25% to 50% effective June 4, with one exception: tariffs on steel and aluminum imports from the UK remain at 25%, with possible changes or quotas starting July 9, 2025, depending on the status of the “U.S.-UK Economic Prosperity Deal.” The Proclamation also noted that the increased tariffs will apply only to the steel and aluminum contents of imported products, whereas the non-steel and non-aluminum contents of imported products will be subject to other applicable tariffs, e.g., Normal Trade Relations duties, Section 301 “China tariffs,” and IEEPA tariffs. 

Pause on Tariff Decision 

The second development relates to the status of the IEEPA tariffs while two separate cases which struck them down as illegal continue on appeal (for prior coverage, see the trade alert dated May 30, 2025). A federal judge in Washington, D.C. granted the government’s motion to stay his preliminary injunction in Learning Resources, Inc. v. Donald J. Trump, et al. ordering the U.S. to stop collecting those duties while the underlying merits of the decision proceed to the U.S. Court of Appeals for the District of Columbia. 

This action nearly mirrors that concerning the decision of the U.S. Court of International Trade (CIT) by a three-judge panel which similarly ruled in V.O.S. Selections, Inc. v. United States that the use of IEEPA by the President to impose tariffs was illegal because those tariffs exceeded the authority granted by Congress to the Executive Branch and, with respect to the “fentanyl” tariffs, did not address the declared national emergency. In that case, the CIT issued a permanent injunction, which was preliminarily stayed the same day by the U.S. Court of Appeals for the Federal Circuit (CAFC). A hearing and final decision whether to keep the stay in place pending the conclusion of the appeals process on the merits of the case is expected shortly. Both cases are widely expected to ultimately reach the U.S. Supreme Court. 

With these new developments, further confusion concerning the “stacking” of the Section 232 and IEEPA tariffs and exemptions for Canadian and Mexican goods under the United States Mexico Canada Agreement (USMCA) will likely result. In an attempt to clarify the order of application of the various tariffs, U.S. Customs & Border Protection (CBP) released guidance on June 3 as follows: 

New Priority Order 

Effective with respect to goods entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern daylight time on June 4, 2025, below is the new priority order of the five presidential actions identified in EO 14289, as amended:  

1. 232 Auto/Auto Parts – Proclamation 10908 of March 26, 2025 (Adjusting Imports of Automobiles and Automobile Parts into the United States), as amended; 

2. 232 Aluminum – Proclamation 9704 of March 8, 2018 (Adjusting Imports of Aluminum into the United States), as amended; 

3. 232 Steel – Proclamation 9705 of March 8, 2018 (Adjusting Imports of Steel into the United States), as amended; 

4. International Emergency Economic Powers Act (IEEPA) Canada – Executive Order 14193 of February 1, 2025 (Imposing Duties to Address the Flow of Illicit Drugs Across Our Northern Border), as amended;  

5. IEEPA Mexico – Executive Order 14194 of February 1, 2025 (Imposing Duties to Address the Situation at Our Southern Border), as amended. 

Applicability 

For articles subject to more than one of the five tariff actions addressed in EO 14289, filers will pay duty in accordance with the prioritization below.  “Subject to” means that duty more than 0% is owed under the tariff action. Filers should calculate duties in the following order, with the understanding that 232 Steel and 232 Aluminum may apply to the same article. 

1. First, filers should determine if an article is subject to the 232 Auto/Auto Parts tariff.  If so, then the article IS NOT subject to the 232 Aluminum, 232 Steel, IEEPA Canada, or IEEPA Mexico tariffs. 

NOTE:  Parts of passenger vehicles and light trucks that qualify for preferential treatment under the United States-Mexico-Canada Agreement (USMCA), ARE NOT subject to the 232 Auto/Auto Parts, the IEEPA Canada, or the IEEPA Mexico tariffs.      

2. Next (if the article is not subject to the 232 Auto/Auto Parts tariff), filers should determine if an article is subject to the 232 Aluminum and/or 232 Steel tariff.  For derivative products subject to both the 232 Aluminum and 232 Steel tariffs, duties will be owed on both the value of the aluminum and steel content of that product. 

If the article is subject to the 232 Aluminum and/or 232 Steel tariffs, as well as subject to IEEPA Canada or IEEPA Mexico tariffs, then the article IS NOT subject to the IEEPA Canada or IEEPA Mexico tariffs.   

NOTE: Aluminum and aluminum derivative products from Russia, and imports of such aluminum products from any country containing aluminum smelt or cast in Russia, ARE subject to the corresponding Section 232 duty rate of 200 percent. 

NOTE: Articles that qualify for preferential tariff treatment under USMCA, ARE NOT subject to the IEEPA Canada or IEEPA Mexico tariffs.   

An article subject to the tariff actions identified in this guidance is still subject to other applicable duties, taxes, fees, exactions, and charges, such as, but not limited to, those set forth in column 1 or 2 of the Harmonized Tariff Schedule of the United States (HTSUS); duties imposed pursuant to Section 301 of the Trade Act of 1974, as amended; duties imposed pursuant to EO 14195, “Imposing Duties To Address the Synthetic Opioid Supply Chain in the People’s Republic of China” (see also CSMS # 65201384), as amended; antidumping and countervailing duties; etc. 

Exclusions From Section 301 Tariffs 

Finally, USTR extended 178 exclusions from the Section 301 tariffs for certain Chinese-originating merchandise (including 14 for solar manufacturing equipment) (for prior coverage, see the trade alert dated September 24, 2024). Those exclusions (the final exclusions granted under the now lapsed exclusion process) were due to expire on May 31 but have been given an additional 90 days to remain in place. The Federal Register notice indicates that the extended exclusions will expire on August 31. Further extensions may be possible but no new exclusion process is expected for any goods of Chinese origin covered by the Section 301 tariffs. 

Insight 

To further complicate matters for global companies, reports of new national security tariff investigations of semiconductors and pharmaceuticals under Section 232 of the Trade Expansion Act of 1962 are expected soon. These reports will likely recommend further tariffs on these merchandise categories – which include all downstream/derivative and related products, such as smartphones and active pharmaceutical ingredients. 

Nonetheless, importers should pursue existing plans and strategies to mitigate the impact of the Section 232 and IEEPA tariffs. Given the length of time needed for final resolution of these tariffs either via litigation or negotiation (and the lack of “trade deals” to date that were expected with the 57 countries targeted by the IEEPA “reciprocal” tariffs), cost-saving initiatives should proceed apace. Any strategies adopted can still impact Normal Trade Relations duties, Section 301 tariffs, and antidumping/countervailing duties. 

It should also be noted that public hearings on the renewal of USMCA mandated in 2026 will begin in October. Because USMCA is a genuine free trade agreement that was ratified by Congress, current law requires that it be voted upon by Congress, either in its current form or as amended. The administration is expected to push for separate levels of U.S. content when performing regional value content calculations to qualify goods as USMCA-originating. 

Written by Damon V. Pike, Mathew Mermigousis and James Pai. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com  

How MGO Helps Businesses Navigate Evolving Tariff Risks 

MGO’s international tax and trade advisory professionals help companies stay ahead of shifting tariff regulations, including Sections 232, 301, and IEEPA. We guide importers through strategic duty planning, supply chain restructuring, and compliance reviews to minimize exposure and maximize opportunity. Whether your business is navigating exclusion renewals, challenging new tariff orders, or planning for USMCA changes, MGO provides clear, actionable guidance grounded in deep regulatory insight and global business experience. Contact us to learn more.  

The post Section 232 Tariffs on Steel and Aluminum Doubled and Related Developments  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• The potential rescheduling of cannabis presents an opportunity to reevaluate your company’s tax structure and increase deductions, reduce income, and simplify accounting.
• Rescheduling may open up access to previously unavailable tax credits, incentives, and deductions at various government levels.
• With anticipated increased investment and cash flow after rescheduling, companies should prepare for potential mergers and acquisitions by seeking support in areas like financial due diligence and post-acquisition planning.

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The rescheduling of cannabis from Schedule I to Schedule III will unlock new opportunities for cannabis businesses. Is your company positioned to capitalize?

Tax Restructuring

If your existing operating structure was optimized for Section 280E mitigation, now is the time to evaluate whether it will still be tax-efficient after rescheduling.

MGO’s dedicated cannabis tax team can analyze your current structure and identify opportunities to increase deductions, reduce income, simplify accounting, and eliminate unnecessary tax exposures. We will help you develop a strategy specific to your business needs that aligns with your operational goals and any regulatory considerations.

Tax Credits, Incentives, and Deductions

Rescheduling should open cannabis operators to a world of previously unavailable tax benefits.

Our tax professionals can comprehensively review your business operations to uncover tax credits, incentives, and deductions that you may qualify for at the federal, state, and local levels.

Financial and Internal Control Audits

While rescheduling will eliminate the Section 280E tax burden and attract new investors to the cannabis industry, it could also lead to a new regulatory framework.

Our audit services can provide assurance to investors that your company is effectively managing risks, complying with any regulatory changes, and maintaining transparency.

Mergers and Acquisitions (M&A)

The projected wave of investment and increased cash flow resulting from rescheduling means more M&A should be on the horizon.

If your company is considering an M&A deal (either as a buyer or seller), MGO can support your efforts with structuring, financial & tax due diligence, Quality of Earnings (QoE) assessments, accounting integration, strategic guidance, and post-acquisition planning.

With a dedicated cannabis team and a comprehensive line of services, MGO can help you take full advantage of the benefits made available by rescheduling. Reach out to our team today.

The post Is Your Cannabis Company Ready to Take Advantage of Rescheduling? appeared first on MGO CPA | Tax, Audit, and Consulting Services.

In the cannabis and hemp industries, capturing the true value of real estate holdings in an M&A deal can be both elusive and central to the overall success of the transaction. Difficult-to-acquire licenses and permits are essential for operating, which often drives up the “ticket price” of property, ignoring operational and market realities that suppress value in the long run. On the flip side, real estate holdings are sometimes considered “throw-ins” during a large M&A deal. These properties can hold risks and exposures, or, in many cases, are under-utilized and present an opportunity to uncover hidden value.

Both Acquirers and Target companies must take specific steps toward understanding the varied layers of risk and opportunity presented by real estate holdings. In the following, we will address some common scenarios and provide guidance on the best way to ensure fair value throughout an M&A deal.

Real Estate as a Starting Point for Enterprise Value

Leaders of cannabis and hemp enterprises must understand that real estate should be a focus of the M&A process from the very beginning. All too often, c-suite executives are well-acquainted with detailed financial analyses for other parts of the business, but have a limited or out-of-date idea of their enterprise’s square footage, details of lease agreements, or comparable values in shifting real estate markets. Oftentimes it takes a major business event, like an M&A deal, to spur leadership to reexamine and understand real estate holdings and strategy. Regrettably, and all too often, principals come to that realization post-closing and realize they may have left money on the table.

In an M&A deal, the party that takes a proactive approach to real estate considerations gains an upper-hand in negotiations and calculating value. Real estate holdings can provide immediate opportunities for liquidity, cost-reduction, or revenue generation. At the same time, detailed due diligence can reveal redundant properties, costly debt obligations, unbreakable leases, and other red flags that would undermine value post-closing.

For both sides of the M&A transaction, real estate strategy and valuation should be a core consideration of the overall goals and value drivers of the deal. A direct path to this mindset is to place real estate holdings on the same level of importance as other assets that drive value – human capital, technology, intellectual property, etc. Ensuring that real estate strategy aligns with business goals and objectives will save considerable headaches and potential liabilities in the later stages of negotiating and closing the deal.
Qualify and confirm all real estate data

One of the harmful side-effects of a laissez-faire attitude toward real estate in M&A is that the entire deal can be structured around data that is simply inaccurate or incomplete. This inconsistency is not necessarily the result of an overt deception, but too often it is simply an oversight. Valuations can also be based upon pride and ego, without supporting market data.

Let’s visit a very common M&A scenario: The Target company has real estate data on file from when they purchased or leased the property (which may have been years ago), and that data says headquarters is 20,000 sq. ft. of office space. Perhaps they invested heavily into improvements like custom interiors that did nothing to add value to the real estate. The Target includes that number in the valuation process and the Acquirer assumes it is accurate. Following the deal, the Acquirer moves in and, in the worst case, realizes there is actually only 15,000 sq. ft. of useable space. Or it is equally common that the Acquirer learns the space is actually 25,000 sq. ft. Either way, value has been misrepresented or underreported. M&A deals involve a multitude of figures and calculations, and sometimes things are simply missed. But those small things can have a major impact on value and performance in the long run.

The only solution to this problem is to dedicate resources to qualifying and quantifying data related to real estate holdings. When preparing to sell, Target companies should review all assumptions – square footage, usage percentage, useful life, etc. – and conduct field measurements and physical condition assessments (“PCA’s”). This will help your team understand the value of your holdings and set realistic expectations, and perhaps just as importantly, it saves you from the embarrassment of providing inaccurate numbers exposed during Acquirer’s due diligence—and getting re-traded on price and terms. That reputation will ripple through the marketplace.

From the Acquirer’s side, the details of real estate holdings should come under the same level of scrutiny as financials, control environment, etc. Your due diligence team should commission its own field measurements and PCA, and also seek out market comparables to confirm appraisals. It is simply unsafe and unwise to assume the accuracy of any of these details. Performing your own assessments could reveal a solid basis to re-negotiate the M&A, and will help shape post-merger integration planning.

Tax Analysis Will Reveal Risks and Opportunities

The maze of tax regimes and regulatory requirements cannabis and hemp operators navigate naturally creates opportunities to maximize efficiencies. This is particularly the case when it comes to enterprise restructuring to navigate the tax burden of 280E.

For example, it may be possible to establish a real estate holding company that is a distinct entity from any “plant-touching” operations. By restructuring the real estate holdings and contributing those assets to this new entity it may be possible to take advantage of additional tax benefits not afforded to the group if owned directly by the “plant-touching” entity. This all assumes a fair market rent is charged between the entities.

Recently, operators have looked to sale/leaseback transactions to help with cash flow needs and thus these types of transactions have gained prominence for cannabis and hemp operators. It is important that these transactions be carefully reviewed prior to execution to ensure they can maintain their tax status as a true sale and subsequent lease, instead of being considered a deferred financing transaction. If a Target company has a sale/leaseback deal established but under audit the facts and circumstances do not hold up, this could open up major tax liabilities for the Acquirer.

When entering into an M&A transaction, it is important that the Acquirer look at the historical and future aspects of the Target’s assets, including the real estate, to maximize efficiencies of these potentially separate operations. It is also equally important to review pre-established agreements/transactions to ensure the appropriate tax classification has been made and that the appropriate facts and circumstances that gave rise to the agreements/transactions have been documented and followed to limit any potential negative exposure in the future.

Contract Small Print Could Make or Break a Deal

An area of particular focus during due diligence should be a review, and close read, of the Target company’s existing property leases and other contracts. There are any number of clauses and agreements that seem harmless and inconsequential on the surface, but can have disastrous effects in difficult situations. In many cases the lease/contract of a property is more important than the details of the property itself. For example, if the non-negotiable rent on a retail location is too high (and scheduled to go higher), there may be no way to ever turn a profit.

The financial distress resulting from the COVID-19 pandemic has brought these issues to the forefront in the real estate industry. Rent payment and occupancy issues are shifting the fundamental economics of many property deals and contracts. If, for example, you are acquiring a commercial location that is under-utilized because of market demand or governmental mandate, you must confirm whether sub-leases or assignments are allowed at below the contract price. If not, you could be stuck with a costly, underperforming asset amid quickly shifting commercial real estate demand.

In many leases and contracts there are Tenant Improvement Allowance conditions that require the landlord to fund certain property improvement projects. If utilizing these terms is part of the Acquirer’s plans, you may need to have frank and open conversations with landlords about whether the funds for these projects are still available, and if those contract obligations will be met. Details like these are often penned during times of financial comfort without consequences to the non-performing party, but a landlord struggling with cash flow may not have the capability to meet contract standards.

These are just a few examples from a multitude of potential real estate contract issues that can emerge. It is recommended to not only examine these contracts very closely, but have dedicated real estate industry experts perform independent assessments that account for broader social, economic, and market realities. That independent analysis will help your executive team formulate a real estate strategy that better aligns with core business objectives.

Dig Deep to Uncover Real Value

There are countless scenarios where issues related to real estate make or break an otherwise solid M&A transaction, whether before or after closing the deal. The only path forward is to treat real estate holdings with the same care and attention paid to the other asset classes driving the deal. The cannabis and hemp industries have recently endured micro-boom-and-bust cycles that have left many assets under-performing. As Target companies offload these assets, and Acquirers seek out good deals, both parties must undertake focused efforts to establish the fair value of complex real estate assets and obligations.

Catch up on previous articles in this series:

• Choosing the Right Cannabis M&A Structure for You

• Cannabis Post-Merger Integration: Strategies for Success

The post Cannabis M&A Real Estate Considerations: Risks and Values Right Under Your Feet appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Deal structure can be viewed as the “Terms and Conditions” of an M&A deal. It lays out the rights and obligations of both parties, and provides a roadmap for completing the deal successfully. While deal structures are necessarily complex, they typically fall within three overall strategies, each with distinct advantages and disadvantages: Merger, Asset Acquisition, and Stock Purchase.

In the following we will address these options, and common alternatives within each category, and provide guidance on their effectiveness in the cannabis and hemp markets.

Key Considerations of an M&A Structure

Before we get to the actual M&A structure options, it is worth addressing a couple essential factors that play a role in the value of an M&A deal for both sides. Each transaction structure has a unique relationship to these factors and may be advantageous or disadvantageous to both parties.

Transfer of liabilities: Any company in the legally complex and highly-regulated cannabis and hemp industries bears a certain number of liabilities. When a company is acquired in a stock deal or is merged with, in most cases, the resulting entity takes on those liabilities. The one exception being asset deals, where a buyer purchases all or select assets instead of the equity of the target. In asset deals, liabilities are not required to be transferred.

Shareholder/third-party consent: A layer of complexity for all transaction structures is presented by the need to get consent from related parties. Some degree of shareholder consent is a requirement for mergers and stock/share purchase agreements, and depending on the Target company, getting consent may be smooth, or so difficult it derails negotiations.

Beyond that initial line of consent, deals are likely to require “third party” consent from the Target company’s existing contract holders – which can include suppliers, landlords, employee unions, etc. This is a particularly important consideration in deals where a “change of control” occurs. When the Target company is dissolved as part of the transaction process, the Acquirer is typically required to re-negotiate or enter into new contracts with third parties. Non-tangible assets, including intellectual property, trademarks and patents, and operating licenses, present a further layer of complexity where the Acquirer is often required to have the ownership of those assets formally transferred to the new entity.

Tax impact: The structure of a deal will ultimately determine which aspects are taxed and which are tax-free. For example, asset acquisitions and stock/share purchases have tax consequences for both the Acquirer and Target companies. However, some merger types can be structured so that at least a part of the sale proceeds can be tax-deferred.

As this can have a significant impact on the ROI of any deal, a deep dive into tax implications (and liabilities) is a must. In the following, we will address the tax implications of each structure in broad strokes, but for more detail please see our article on M&A Tax Implications (COMING SOON).

Asset Acquisitions

In this structure, the Acquirer identifies specific or all assets held by the Target company, which can include equipment, real estate, leases, inventory, equipment and patents, and pays an agreed-upon value, in cash and/or stock, for those assets. The Target company may continue operation after the deal.
This is one of the most common transaction structures, as the Acquirer can identify the specific assets that match their business plan and avoid burdensome or undesirable aspects of the Target company. From the Target company’s perspective, they can offload under-performing/non-core assets or streamline operations, and either continue operating, pivot, or unwind their company.
For the cannabis industry, asset sales are often preferred as many companies are still working out their operational specifics and the exchange of assets can be mutually beneficial.

Advantages/Disadvantages

Transfer of liabilities: One of the strongest advantages of an asset deal structure is that the process of negotiating the assets for sale will include discussion of related liabilities. In many cases, the Acquirer can avoid taking on certain liabilities, depending on the types of assets discussed. This gives the Acquirer an added line of defense for protecting itself against inherited liabilities.

Shareholder/third-party consent: Asset acquisitions are unique among the M&A transaction structures in that they do not necessarily require a stockholder majority agreement to conduct the deal.

However, because the entire Target company entity is not transferred in the deal, consent of third-parties can be a major roadblock. Unfortunately, as stated in our M&A Strategy article, many cannabis markets licenses are inextricably linked to the organization/ownership group that applied for and received the license. This means that acquiring an asset, for example a cultivation facility, does not necessarily mean the license to operate the facility can be included in the deal, and would likely require re-application or negotiation with regulatory authorities.

Tax impact: A major consideration is the potential tax implications of an asset deal. Both the Acquirer and Target company will face immediate tax consequences following the deal. The Acquirer has a slight advantage in that a “step-up” in basis typically occurs, allowing the acquirer to depreciate the assets following the deal. Whereas the Target company is liable for the corporate tax of the sale and will also pay taxes on dividends from the sale.

Stock/Share Purchase

In some ways, a stock/share purchase is a more efficient version of a merger. In this structure, the acquiring company simply purchases the ownership shares of the Target business. The companies do not necessarily merge and the Target company retains its name, structure, operations and business contracts. The Target business simply has a new ownership group.

Advantages/Disadvantages

Transfer of liabilities: Since the entirety of the company comes under new ownership, all related liabilities are also transferred.

Shareholder/third-party consent: To complete a stock deal, the Acquirer needs shareholder approval, which is not problematic in many circumstances. But if the deal is for 100% of a company and/or the Target company has a plenitude of minority shareholders, getting shareholder approval can be difficult, and in some cases, make a deal impossible.

Because assets and contracts remain in the name of the Target company, third party consent is typically not required unless the relevant contracts contain specific prohibitions against assignment when there is a change of control.

Tax Impact: The primary concern for this deal is the unequal tax burdens for the Acquirer vs the Shareholders of the Target company. This structure is ideal for Target company shareholders because it avoids the double taxation that typically occurs with asset sales. Whereas Acquirers face several potentially unfavorable tax outcomes. Firstly, the Target company’s assets do not get adjusted to fair market value, and instead, continue with their historical tax basis. This denies the Acquirer any benefits from depreciation or amortization of the assets (although admittedly not as important in the cannabis industry due to 280E). Additionally, the Acquirer inherits any tax liabilities and uncertain tax positions from the Target company, raising the risk profile of the transaction.

Three Types of Mergers

1: Direct Merger

In the most straight-forward option, the Acquiring company simply acquires the entirety of the target company, including all assets and liabilities. Target company shareholders are either bought out of their shares with cash, promissory notes, or given compensatory shares of the Acquiring company. The Target company is then considered dissolved upon completion of the deal.

2: Forward Indirect Merger

Also known as a forward triangular merger, the Acquiring company merges the Target company into a subsidiary of the Acquirer. The Target company is dissolved upon completion of the deal.

3: Reverse Indirect Merger

The third merger option is called the reverse triangular merger. In this deal the Acquirer uses a wholly-owned subsidiary to merge with the Target company. In this instance, the Target company is the surviving entity.

This is one of the most common merger types because not only is the Acquirer protected from certain liabilities due to the use of the subsidiary, but the Target company’s assets and contracts are preserved. In the cannabis industry, this is particularly advantageous because Acquirers can avoid a lot of red tape when entering a new market by simply taking up the licenses and business deals of the Target company.

Advantages/Disadvantages

Transfer of liabilities: In option #1, the acquirer assumes all liabilities from the Target company. Options #2 and #3, provide some protection as the use of the subsidiary helps shield the Acquirer from certain liabilities.

Shareholder/third-party consent: Mergers can be performed without 100% shareholder approval. Typically, the Acquirer and Target company leadership will determine a mutually acceptable stockholder approval threshold.

Options #1 and #2, where the Target company is ultimately dissolved, will require re-negotiation of certain contracts and licenses. Whereas in option #3, as long as the Target company remains in operation, the contracts and licenses will likely remain intact, barring any “change of control” conditions.

Tax impact: Ultimately, the tax implications of the merger options are complex and depend on whether cash or shares are used. Some mergers and reorganizations can be structured so that at least a part of the sale proceeds, in the form of acquirer’s stock, can receive tax-deferred treatment.

In Conclusion

Each deal structure comes with its own tax advantages (or disadvantages), business continuity implications, and legal requirements. All of these factors must be considered and balanced during the negotiating process.

The post Choosing the Right Cannabis M&A Structure for You appeared first on MGO CPA | Tax, Audit, and Consulting Services.