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For business combinations, there may be a hidden gem lurking in the recently passed CARES Act (Coronavirus Aid, Relief, and Economic Security). Among the many provisions of CARES is the revival of net operating loss (NOL) provisions. In fact, buyers and sellers can collaborate on stock purchases in the recent past to take advantage of the potential NOL's.

Federal income tax rules were changed in 2017 to remove the benefits of NOL's after 2017. CARES extends the removal year to 2021. Thus, losses generated in 2018-2020 can now be carried back for five years. It is possible that the buyer could apply an NOL to the years before the acquisition occurred. Alternatively, the buyer may elect to carry the target company's NOL's forward, assuming at some point the target's taxable earnings can offset the NOL's. The carryback approach is the most expedient way to secure these benefits now, rather then waiting for future positive income offsets. And, the IRS has suggested that these cash refunds may be accelerated.

Buyers and sellers will almost certainly have to coordinate their efforts. Many stock acquisitions preclude the buyer from amending pre-closing tax returns of the seller without their consent. They each can share the NOL carryback benefit, providing further incentive to cooperate. Since the Federal corporate tax rate was reduced from 35% to 21% in 2018, carrying back to years prior to 2018 is even more beneficial. If the seller was to receive credit post-closing for NOL's, a new agreement could be forged so that both parties benefit from carryback NOL's.

Based upon the CARES Act, participants to an impending deal should carefully analyze the best approach to capturing NOL's. The seller's representatives should delineate in some detail how these losses actually represent an increase in value, beyond the adjusted EBITDA. Thus, the loss is akin to cash left in the business for the benefit of the buyer.