Key sell-side M&A tax considerations for industrial companies

M&A activity of industrials companies in 2026 is being reshaped by digitalization, energy transition and the growth of AI infrastructure. This is prompting companies to make sharper portfolio choices and targeted investments in innovation and automation. Structural pressures such as labor shortages, geopolitical risks and supply chain challenges are driving acquisitions of automation and digital capabilities. Corporate entities are focusing on divesting non-core assets and reallocating capital to technology-driven, higher-growth businesses, with private equity favoring scalable, recurring-revenue models. Subsector M&A activity is expected to reflect these trends, with distinct priorities across aerospace and defense, automotive, business services and engineering and construction.

Key sell-side M&A tax issues for industrials companies

The sale of an industrials business in an M&A transaction is often a complex transaction with significant tax implications. Sellers who understand and proactively address these issues can maximize after-tax proceeds, reduce deal friction and avoid costly surprises.

Here are the most critical tax considerations for industrials companies preparing for a sale.

1. Deal structure: Asset sale vs. stock sale

a. Asset sale

• In an asset sale, the company sells its assets (tangible and intangible) directly to the buyer. This structure generally results in a step-up in the tax basis of the assets for the buyer, allowing for increased depreciation and amortization deductions post-closing.
• For the seller, an asset sale can trigger double taxation if the seller is a C corporation: first at the corporate level on the gain from the sale of assets, and again at the shareholder level upon distribution of proceeds. S corporations and partnerships generally avoid this double tax, but the character of the gain (ordinary vs. capital) and the allocation of purchase price among asset classes are critical.
• In an asset sale, certain assets, such as inventory or receivables, may generate ordinary income rather than capital gain, impacting the seller’s tax liability.
• The sale of a limited liability company (LLC) that is taxed as a disregarded entity (DRE) typically constitutes an asset sale for tax purposes.

b. Stock sale

• In a stock sale, the buyer acquires the equity interests of the company. For C corporation shareholders, this typically results in capital gain treatment. S corporation and partnership interests may have more complex results, especially if the entity holds certain assets known as ‘hot assets’ (ordinary income- producing assets, generally).
• Buyers often prefer asset deals for the step-up in basis, but may accept a stock deal if a section 338(h)(10) or 336(e) election is available, allowing the transaction to be treated as an asset sale for tax purposes.

c. Section 338(h)(10) and 336(e) elections

• These elections allow certain stock sales to be treated as deemed asset sales, providing a basis step-up for the buyer. However, both parties must agree, and the seller must consider the impact on its own tax position, including state tax and potential double taxation for C corporations.

2. Tax attributes and limitations

a. Net operating losses (NOLs) and tax credits

• The value of NOLs and other tax attributes (such as credits) may be limited or lost in a change of control due to section 382 and related rules. Sellers should analyze the potential impact of these limitations and be prepared to document the availability and usability of these attributes for the buyer.

b. Section 382 and built-in gains

• If the company has significant built-in gains or losses, the section 382 limitation may be increased or decreased, affecting the value of NOLs post-transaction. (Notice 2003-65 provides guidance on maximizing the use of built-in gains.)

3. Depreciation, amortization and bonus depreciation

• In an asset sale: The buyer’s ability to claim bonus depreciation (which was expanded under the recent OBBBA legislation) or section 179 expensing on acquired assets can be a significant value driver. Under current law, 100% bonus depreciation is available for qualified property acquired after Jan. 19, 2025, but not for used property acquired from a related party. Sellers should be prepared to provide detailed fixed asset records, including cost basis, placed-in-service dates and depreciation methods, to support purchase price allocation and buyer’s tax planning.
• In a stock sale: The sale does not generate a bonus depreciation deduction, because the assets of the business are not sold in the stock sale. However, if the business purchased large amounts of assets eligible for bonus depreciation prior to the stock sale, the ability of the buyer to claim a large, immediate deduction increases the after-tax value of the business to the buyer. Sellers should quantify this benefit and use it to negotiate a higher purchase price or more favorable terms.

4. State and local tax (SALT) considerations

• State and local tax exposure can be significant in the industrials sector, especially for companies with multi-state operations, manufacturing plants or inventory in multiple jurisdictions.
• Sellers should review nexus, apportionment and compliance in all relevant states, and be prepared for buyer due diligence on potential exposure for income, franchise, sales/use and property taxes.
• Sales tax liabilities and compliance issues can directly impact deal negotiations, structure and net proceeds. Sellers should proactively review and address their sales tax compliance across all relevant jurisdictions, as buyers often require indemnities, escrow holdbacks or purchase price adjustments to protect against successor liability for unpaid taxes, especially under bulk sale laws.

5. Transaction expenses and deductibility

• The deductibility of transaction costs (legal, accounting, investment banking, etc.) in some cases depends on whether the costs are facilitative (capitalized) or non-facilitative (deductible). Sellers should segregate and document these costs carefully.
• Certain costs incurred to facilitate the sale (e.g., costs to prepare the business for sale) must be capitalized, while others (e.g., costs to defend against a hostile takeover) may be deductible.

6. Tax due diligence and representations

• Sellers should conduct their own pre-sale tax due diligence to identify and remediate potential issues, such as unfiled returns, uncertain tax positions or exposure to employment, excise or environmental taxes.
• Buyers will require robust tax representations, warranties and often indemnities in the purchase agreement. Proactive remediation and disclosure can reduce escrow or holdback requirements and facilitate a smoother closing.
• Representations and warranties insurance (RWI) often plays a pivotal role in the sale process by shifting certain risks associated with breaches of representations and warranties from the seller to a third-party insurer, thereby facilitating smoother negotiations and enhancing deal certainty. In sell-side M&A transactions, RWI allows sellers to limit their post-closing indemnity obligations, often reducing or eliminating the need for escrow holdbacks or purchase price reductions that buyers might otherwise demand to cover potential breaches.

7. Treatment of contingent consideration and earnouts

• If the deal includes earnouts or contingent payments, the tax treatment can be complex. Sellers should understand the timing and character of income recognition, the potential for installment sale treatment and the impact on purchase price allocation.

8. Employee and compensation issues

• The sale may trigger acceleration of deferred compensation, stock options or other benefits, with potential tax consequences for both the company and its employees. Section 280G (golden parachute payments) and section 409A (nonqualified deferred compensation) should be reviewed for compliance and planning.

9. International tax considerations

• For industrials companies with cross-border operations, issues such as transfer pricing, foreign tax credits and repatriation of earnings must be addressed. The structure of the sale (asset vs. stock, local law requirements) can have significant tax consequences in both the U.S. and foreign jurisdictions.
• In the sale of a U.S. company with a foreign subsidiary holding substantial ‘trapped cash,’ buyers will closely scrutinize the cost of accessing those offshore funds. If repatriating the cash to the U.S. would trigger a significant foreign withholding tax or other local tax liabilities, buyers may view the trapped cash as less valuable than cash held domestically, and may therefore discount the purchase price to reflect the anticipated foreign tax cost required to extract those funds.

10. Tax year-end and short-period returns

• The sale of a subsidiary or business may trigger a short tax year, requiring the filing of a short-period return. The form and timing of the transaction (beginning or end of day rules) can affect which party bears the tax liability for income or deductions on the closing date.