With the all-but-guaranteed tax increases in 2022 that are just around the corner, many corporate transactions that were already in the pipeline are accelerating to close before year-end. There are a range of potential tax implications that give deal makers reason to push through to an early deadline:

  • President Biden’s plan to double the long-term capital gains tax rate for those at the top, from 20% to 40%.
  • The top marginal income tax bracket would also rise under President Biden’s plan to 39.6% from 37%.
  • An end to the 1031 like-kind tax break that lets real estate investors defer capital gains taxes.
  • Closing the “carried interest” tax loophole.

And yet, despite the potential tax increases on the horizon, deal activity isn’t expected to let up. Heading into year-end, buyers and sellers will need to be more proactive, engage in early due diligence, and explore alternate strategies to preserve value.

2022 Proposed Tax Changes

Tax increases have been expected for a while and the September 2021 proposal differs from the White House’s original budget draft. That means there may still be room for compromise in certain areas as some of the proposals have not been finalized yet. That said, high earners with modified adjusted gross income of $450,000 or more ($400,000 for single filers) and corporations will be most impacted.

  • Capital gains: increase from 20 to 25 percent
  • Ordinary tax rate: increase of the top rate from 37 percent to 39.6 percent plus a three percent surcharge on individuals, estates, and trusts with AGI ≥ $5 million.
  • Corporate tax rate: increase from 20 percent to 26.5 percent ($5+ million); 18 percent (≤ $400,000); and 21 percent ($400,000 – $5 million)
  • Global Intangible Low-Taxed Income (GILTI): implement a global minimum tax; GILTI could be calculated on a per-country basis.
  • Multinational tax rates: Limitation on deducting interest for U.S. multinationals with U.S. operations and debt
  • Estate planning: Lower the federal estate tax exemption from $24 million (married filing jointly) / $12 million (single filers) to about $12 million per couple (about $6 million single) in 2022
  • Pass-Through Entity Deduction: Limited to $500,000 for high earners (married filing jointly), $250,000 (married filing separately), $400,000 (other taxpayers), and $10,000 for trusts and estates. Most pass-through business income for taxpayers at these levels would also incur a 3.8 percent net investment income tax.
  • Restrict qualified small business stock (QSBS), or Section 1202, making it more difficult for small companies to raise money

It’s these overall tax hikes that are most concerning to M&A professionals, with the higher capital gains tax rate topping the list. As a result, capital gains will need to be carefully evaluated against cash flows and exit plans.

This trend is not exclusive to the U.S. as it mirrors what’s happening in other countries, too. Recently, more than 130 countries agreed to a 15 percent minimum global tax rate.[1]

Although the final legislation may not arrive until later in December, it’s important to stay on top of potential changes now. The ability to quickly pivot and shift tax strategy at year-end can save a significant amount of money in a transaction.

Trends in M&A Activity

Given the tax climate, it’s unsurprising that most deal makers are attempting to close before December 31 to avoid most of the expected tax increases in 2022. The Federal Trade Commission (FTC) even had to modify its premerger review process to accommodate the influx of filings. Deal volume was 300 percent higher in the first half of 2021 compared to the year before – and roughly equaled total deal volume in all of 2020.[2]

Heading into next year, it seems that deal activity will stay about the same. One of COVID-19’s side effects is that buyers and sellers are approaching deals a bit differently: there is more comfort in calculated risk-taking and M&A is less of a transaction and more of a value-add.[3] Interest rates also remain low, at least for now.

Deal makers believe that these changes won’t fundamentally alter the corporate M&A landscape; rather, buyers and sellers will need to understand that pricing will be different. The value proposition and potential deal structures may need to change. As a result, expect to dive deeper into due diligence and cash flow modeling.

One strategy is to execute more deal driven by tax-specific considerations. It’s also possible to explore more complicated financial structures if it can be shown to save on taxes in the short- and long-term.

Using earnouts to bridge valuation gaps is another option, especially in an uncertain environment. The key here is to clearly define post-deal terms and metrics.[4]

Taxes aside, pursuing moderate-size deals more frequently and systematically has been shown to produce better long-term results, according to McKinsey research[5]. Regardless of the deal strategy, at least half of CFOs expect M&A to make up anywhere between 11 and 50 percent of organizational growth over the next three years.

Considerations for Year-End M&A Planning

In corporate M&A transactions, there are few guarantees. Nevertheless, there are a few signs that may indicate that a deal can close by December 31.

  • A transaction is more likely to happen early or on time if offers have identified actionable, attainable steps for closing the deal.
  • A pre-letter of intent with completed due diligence and organized documents and financials will go a long way in shortening the time it takes to close a deal.
  • Due diligence is completed or nearly done before reaching the exclusivity period. For sellers, sell-side due diligence is done prior to going to market.


Deal activity is not expected to slow down once tax rates go up. But it will be more challenging to get the same return on investment as before. Also at stake are potential state tax changes, which could further impact deal value and profitability. Buyers or sellers considering a deal prior to year-end need to involve advisors as early in the process as possible. For more information, contact Enrique Brito, Managing Director of Transaction Advisory Services.

[1] https://www.nytimes.com/2021/10/08/business/oecd-global-minimum-tax.html
[2] https://deloitte.wsj.com/articles/trends-and-strategies-in-a-red-hot-deal-market-01634062314
[3] https://www.jpmorgan.com/solutions/cib/investment-banking/2021-global-ma-outlook
[4] https://www.pcecompanies.com/resources/how-earnouts-close-the-valuation-gap-during-covid-19
[5] https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-one-approach-to-m-and-a-is-more-likely-to-create-value-than-all-others