One of the niches in our advanced tax planning practice is in the area of mergers and acquisitions, so we closely monitor the impacts of legislative head winds that impact this segment. The landscape of mergers and acquisitions (M&A) is ever evolving and profoundly influenced by external factors such as pending tax legislation, tariffs concerns, and economic uncertainty. In 2025, these elements are reshaping strategies and driving shifts in the M&A markets. Here’s an in-depth look at how these factors are impacting dealmaking.

Impact of Pending Tax Legislation on M&A Markets

Pending tax legislation can have far-reaching consequences on the M&A markets, affecting deal structures, valuations, and strategic decisions. Changes in tax legislation can impact various aspects of M&A, including the cost of capital, liquidity, corporate tax rates, and the treatment of acquired assets and liabilities.

Corporate Tax Rates

One of the most significant factors in M&A decision-making is the corporate tax rate. Pending tax legislation that proposes changes to corporate tax rates can either encourage or discourage M&A activity. A reduction in corporate tax rates generally makes mergers and acquisitions more attractive, as it increases post-tax earnings and enhances shareholder value. Conversely, an increase in corporate tax rates can diminish the appeal of M&A transactions, making them less financially beneficial. Both scenarios will also significantly impact how we structure in a pre-acquisition entity to minimize overall tax liabilities.

We anticipate corporate tax rates to either remain unchanged or be reduced for domestic production activities. Either would strengthen the M&A market in the coming years.

Capital Gains Tax

Capital gains tax is another crucial element that affects M&A transactions. Pending tax legislation that alters capital gains tax rates can impact both buyers and sellers. Higher capital gains taxes may deter sellers from divesting their assets, thus reducing the supply of companies available for acquisition. On the other hand, lower capital gains taxes can incentivize sellers to pursue M&A deals, thereby increasing market activity. Both scenarios will also significantly impact how we structure an acquisition to minimize overall tax liability to the seller.

We anticipate capital gains rates to remain unchanged. However, there is the likelihood that changes will be made to the carried interest rules which might incentivize private equity to maintain a longer holder period and slow down M&A activity.

Interest Deductibility

The deductibility of interest expenses is a key factor in leveraged buyouts and other debt-financed acquisitions. Pending legislation that affects interest deductibility can significantly influence the structure of M&A deals. Restrictions on interest deductibility can increase the cost of debt financing, making leveraged transactions less attractive. This can lead to a decline in M&A activity as companies seek alternative financing methods.

Pending tax legislation in 2025 is poised to reshape M&A markets through a mix of incentives, uncertainty, and strategic shifts. Key developments include the expiration of Tax Cuts and Jobs Act (TCJA) provisions, potential corporate tax rate reductions, and regulatory changes under the Trump administration. Here’s how these factors are influencing dealmaking:

• Accelerated transactions: Sellers, particularly pass-through entities, may rush to close deals before the Qualified Business Income Deduction (QBID) expires at year-end, which currently provides a 20% tax break on eligible income.
• Corporate tax rate speculation: A proposed reduction of the U.S. corporate tax rate to 15% (from 21%) could spur acquisitions by boosting after-tax profits and valuations, though uncertainty about its implementation is causing short-term delays.
• Private equity momentum: Over $2.6 trillion in unspent private equity capital is driving demand for mid-market deals, with tax-efficient structures like rollover equity gaining traction.

Valuation and Deal Structures

Changes to corporate tax rates, capital gains tax, and interest deductibility can alter the financial attractiveness of mergers and acquisitions, while strategic implications can drive shifts in the competitive landscape, corporate governance, and business strategies.

• Bonus depreciation phaseout: The TCJA’s 100% bonus depreciation for assets will drop to 40% in 2025, incentivizing companies to accelerate asset purchases and favoring cash-heavy deals over stock transactions. Proposed legislation to return to the 100% bonus depreciation environment will add incentives to accelerate acquisitions.
• Earn-out clauses: Buyers are increasingly tying payments to post-deal performance metrics to hedge against potential tax law changes affecting target profitability.
• Tax-deferred structures: Lower individual capital gains taxes under Republican proposals may reduce demand for tax-deferred reorganizations (e.g., Section 368 exchanges), shifting preference toward cash transactions.

Sector-Specific Impacts

Certain sectors are more vulnerable to tariffs and economic uncertainty than others. The manufacturing and automotive sectors, reliant on global supply chains, face heightened risks. Meanwhile, the technology and defense sectors are seeing increased foreign investment in U.S. manufacturing but face stricter national security reviews.

• Pass-through entities: QBID expiration could disproportionately affect S-corporations and partnerships, potentially triggering a wave of sales to avoid higher 2026 tax liabilities.
• Manufacturing and energy: Proposed tariff hikes and potential rollbacks of Inflation Reduction Act credits may depress valuations in tariff-exposed sectors while boosting domestic supply chain-focused acquisitions.
• Technology: AI-driven deals face regulatory hurdles, pushing buyers toward joint ventures and minority stakes instead of full acquisitions.

Cross-Border Considerations

Economic uncertainty and tariffs are leading to significant delays and cancellations of transactions, particularly cross-border deals. For instance, companies like Nissan and Honda are postponing mergers due to unpredictable trade policies and supply chain risks.

• CFIUS scrutiny: Heightened national security reviews under the Trump administration are complicating foreign acquisitions of U.S. infrastructure and tech assets, despite a more lenient antitrust enforcement stance.
• Tariff offsets: New import tariffs (e.g., 10-25% on Chinese goods) are prompting buyers to favor targets with localized supply chains, particularly in automotive and heavy industries.

Long-Term Strategic Shifts

Pending tax legislation can drive changes in business strategies as companies seek to optimize their tax positions. Firms may pursue mergers and acquisitions as a means of achieving tax efficiencies, such as utilizing tax loss carryforwards or optimizing the tax treatment of international operations. Additionally, tax incentives for specific activities, such as research and development or renewable energy investments, can influence the strategic decisions of companies engaged in M&A.

• Tax clause proliferation: Purchase agreements now routinely include provisions addressing retroactive tax liabilities and MAC (Material Adverse Change) clauses tied to legislative outcomes. These provisions need to be baked into valuations when selling to mitigate the risk of the MAC.
• Regulatory arbitrage: Companies are accelerating North American-focused deals to mitigate risks from potential EU digital service taxes and U.S. tariff volatility.

While tax uncertainty is temporarily suppressing mega-deals, the confluence of private equity demand, potential rate cuts, and TCJA expiration timelines suggests a rebound in H2 2025. Dealmakers prioritizing flexible structures, localized targets, and proactive tax modeling are best positioned to capitalize on these shifts.

We will remain hyper focused on the pending 2025 tax law changes and their impact on the M&A market. Please let us know if you would like to discuss your individual situation in more detail