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Annotated diagram of Schedule DTax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more.

M&A: Taxes

How can tax consequences to the buying and selling of companies in an acquisition affect the treatment of my stock options?

The buyer and seller may try to structure the transaction so that one company receives tax benefits along with having the withholding and tax-reporting obligations. For example, the acquirer may want the tax deduction associated with the exercise of NQSOs (i.e. the company can deduct the spread between exercise price and market price) and therefore may wish to have the options continue after the acquisition. Upon the release of FASB Statement No. 141 (R), the accounting rules for business combinations changed for fiscal years beginning after December 15, 2008. This may also affect the treatment of stock options.

Whether or not the companies structure the deal as a tax-free reorganization can also affect your tax treatment, as shown by an IRS Written Determination from the Office of Chief Counsel at the IRS.

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