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What are Tax implications to enter into another business
If you’re a CEO looking to acquire another business, there are several tax implications to consider. Depending on where your new business is located, these implications can vary, from the structure of your transactions to the country’s tax laws.
If the acquisition involves transferring ownership of real estate or other assets, there may be transfer taxes involved.
Transfer tax is a charge imposed on the transfer of ownership or title to property from one person or entity to another. It is usually a separate cost that is not deductible from federal or state income taxes. However, it may be added to the total costs once sales profit is calculated.
Capital gains taxes
If the business you are acquiring has appreciated assets, it may need to pay capital gains tax when those assets come to sell in the future. These assets include stocks, bonds, digital assets, jewellery and real estate.
Capital gains tax is the enlisted profit that an investor makes once their investment is sold. Long-term gains are imposed on profits made from investments that have been held for at least a year.
Depreciation and amortization
The acquiring business may be able to deduct the cost of acquisition over time through depreciation and amortization deductions.
Amortization involves the process of charging the cost of an intangible asset to expense over the expected period of use. This helps to shift the asset from the balance sheet to your income statement, reflecting the asset’s consumption.
Depreciation is the planned reduction in the value of a tangible asset over its lifetime by charging it to expense. It is usually applied to fixed assets which often experience a loss in their usage over several years.
NOLs and tax credits
The acquiring business may be able to use the acquired business’s net operating losses (NOLs) or tax credits to offset its tax liability.
NOLs occur when the deductions for the year are more than the gross income. You can use an NOL by deducting it from your income in a year that’s separate from the year the NOL occurred.
You can use 100% of an NOL and reduce the tax liability to zero for tax years 2018, 2019 and 2020. However, since 2021, you can now only use up to 80% of an NOL for this tax year onwards.
What are the tax risks?
There are many risks to be aware of when it comes to the acquisition of a new business. If you are currently facing accusations or investigations into your tax operations, it could be worth seeking expert advice.
Tax risks could include anything from unrecognised tax liabilities, transfer pricing issues, changes in tax laws and unfavourable tax rulings.