Business acquisitions, like other forms of transactions, can involve many potential pitfalls. One such pitfall that can be easily avoided through accurate financial reporting is the false or incomplete preparation of information. In most cases a company would be required to provide information on the type of financing involved and any potential contingencies to mitigate potential liabilities. However, some businesses are so well known, or they have been in existence for a long period of time, that their previous liabilities are considered immovable. In this case, the transaction cannot be re-approved until new information is provided. Companies that are highly profitable and secure may not find it necessary to provide this type of new information.
In many circumstances a company needs to purchase raw materials at a reduced price in order to avoid taxes and interest on the purchase. This type of transaction, technically called a reduction in debt, can actually reduce a company’s taxable income. However, most business owners make the mistake of confusing this with an ordinary purchase. They believe that they are receiving a reduction in the amount they owe the Internal Revenue Service when they are actually only receiving discounted value. The Internal Revenue Service, in fact, is aware that most reductions in debt do not result in cash payments to the IRS but rather in delayed transfer of payments. This delayed transfer of payments is subject to the statute of limitations.
Another common problem faced by business owners arises from an inability to accurately predict the tax implications of a business acquisition. Sometimes the acquisition is very large and at times it becomes difficult to determine a business’s taxable income until several years after the transaction closes. This delay could easily lead to substantial penalties being imposed on the business.
Often companies will try to take advantage of new laws that may be applied to their acquisition of a business. One such law is the “safe harbor” provision. Basically, this provision permits a business to operate within state tax and business licensing jurisdictions for a limited period of time. The benefit to the business owner is the ability to operate under the provision for a longer period of time while the company undergoes the integration process. Unfortunately for the business, this provision can often result in double taxation for the business and its owner. This is because during the period of the incorporation process the business may be deemed a foreign corporation which will have to pay U.S. corporate tax on its corporate income and also on the assets of the business.
Deferred tax Meaning is another legal issue that faces businesses often when they are involved in business acquisitions. In this area of the law it is important to understand exactly what tax consequences apply to the acquisition. The definition of deferred tax means paying tax on income or assets that has not been earned yet. Basically any income or assets acquired are deferred until such time that they are brought into play in the operation of the business. Business acquisitions deferred taxes are a major consideration when a company makes an acquisition.
Some companies take the approach that the purchase of a foreign entity will be covered by the foreign tax law. While this may cover the purchase price, typically it does not address the effects of the acquisition. There are many factors that must be considered in order to determine whether the purchase is subject to acquisitions deferred taxes. These include: whether the foreign entity is paying taxes on its earnings; what type of tax the foreign country is applying to its citizens; and what type of tax the new corporation will be paying as a result of incorporating in that country. These are some of the considerations that must be made when a business considers acquiring another corporation in order to continue operations from within that jurisdiction.
Deferred taxes are not only complex issues but are often laden with pitfalls. Many large corporations have been able to successfully negotiate solutions with the IRS concerning these complex issues. If you are involved in a business acquisition situation, it is important to retain the services of a qualified attorney if this issue is of concern to you. They will be able to advise you as to the technical and tax implications of the transaction and how best to resolve them. In the end, it can be quite beneficial to both parties if all of the facts can be resolved prior to the business acquisition. By doing so, this will help avoid possible lawsuits as well as help to ensure the smooth transition of ownership into the new ownership.
