What are business acquisitions? Well, you can think of business acquisitions as any acquisition which involves a sale of an interest in a company. For example, if you purchase a company that produces a number of widgets, and you want to finance the purchase, then you have a deferred tax in which you’re gaining access to the widget manufacturer. The great thing about deferred tax is that it doesn’t matter what the price is because the tax is deferred until you actually sell the asset or make a payment. That means you can write off a huge portion of the purchase price with a little help from an expert like you.
Can you write off the full amount of your deferred tax liabilities? Well, no, you can’t. This is where things like derivatives come in. Derivatives are financial products which are contracts between two parties that specify an amount of money and an agreed upon date on when that money will be returned.
If you were to buy a widget factory, and then you found that the amount of money you could afford to pay on a long term basis was only a fraction of what the value of the factory would be after a few years, then you might be in for some financial trouble. In this case, it would be best to write off the purchase price of the factory along with any deferred tax liabilities. You’d be better off financially by writing off the price of the assets instead of their value.
When you buy a company, many times you make a commitment, even before you make an offer on the assets. You pledge the benefits of owning the company, in the form of stock, for a period of time. That’s really where deferred tax liabilities come into play. The reason is that once the stock is purchased, the owner’s tax obligation immediately stops.
However, if you’ve financed the whole deal using cash, then that’s not really an issue, right? Well, not exactly. There are a lot of tax liabilities associated with the purchase of assets, and one of them is capital gains. Remember, the price you paid for the assets was basically their value in your tax book at the time of the sale. Now, if you had to pay the taxes on that gain, it would actually exceed the price you paid for the assets, because you technically acquired them while they were still discounted.
This is why so many businesses decide to write off the price of the acquisition in their books of accounts – because they want to minimize their deferred tax liabilities. Sometimes this is accomplished by structuring the transaction so that you receive money in the form of a line of credit that you can use immediately. Or perhaps you can obtain a loan that is based upon the fair market value at the time of the acquisition and write off the difference (net gain) as a tax-deductible business expense. It really depends on the nature of the assets involved, but I would recommend keeping all of these separate from one another and never combining them, because you could be running into a lot of trouble down the road.
In any case, the whole business acquisition process can be rather complex and it’s definitely not a walk in the park. That’s why it’s important that you consult with a business acquisition attorney if you’re thinking about purchasing assets in order to take advantage of the tax deferral. He or she will be able to assist you and point out potential problems so that you don’t get into trouble. There are also specialists such as bankers and attorneys that deal specifically with business acquisition and tax issues, so it’s always wise to have a consultation with one of them. Don’t feel that you need to go it alone; if you feel you need legal advice, then you’ll likely find a lawyer to help you.