Federal tax laws become particularly tricky when you buy or sell a company and must deal with contingent liabilities. The importance of the tax write-offs have become increasingly important and include such items as employee pensions and healthcare, environmental liabilities and pending lawsuits. Before you can effectively deal with the paperwork and accounting involved in a taxable asset acquisition, you first must determine which liabilities have been transferred to the buyer.
1. Structure the deal to your favor. When dealing with an asset acquisition, you often can compromise as to which liabilities will be included in the sale. As the seller, you may want to divest yourself of all liabilities or you may want to keep some back for your own tax benefit. According to Spiegel & Utrera PA, offering to sell your company through an asset sale often makes the deal more attractive to buyers.
2. Gauge whether the addition of contingent liabilities in the contract raises your gains or increases your tax liability. Additionally, you must make sure that installment payments can cover the costs you incur to maintain various contingent liabilities. If you are the buyer, you must determine whether the liabilities create immediate income that you must report and which of the contingent liabilities may be deducted, if any.
3. Define the liabilities and how and when the financial aspect of the asset takes place. For example, if as a buyer you incur costs normally associated with the new business, the costs typically are your responsibility and you receive any tax benefits. If as a buyer you incur costs from liabilities to which you did not agree in the original deal, you should receive a deduction for the costs.
4. Reduce the price of your business according to the amount of the liabilities you plan on transferring to the buyer. As a buyer you must ensure that your final price reflects the contingent liabilities, which often can be negotiated to improve the entire sale package.
- The key to separating the liabilities of buyer and seller in a taxable asset acquisition is to determine whether the costs were incurred after completion of the sale or if they were incurred while the company was still under the control of the seller. For example, a buyer assumes the contingent liability of death benefits for employees still living upon completion of the sale. If an employee dies before the closing, the seller incurs the costs.
- Buyer beware: Not all contingencies are transferable, so check on contracts, licenses, franchise agreements and leases, which the seller may not have the authority to sell. If they are included in your asset acquisition agreement, check first to make sure they are transferable.
- Most tort liabilities remain the responsibility of the seller, according to "The Treatment of Contingent Liabilities in Taxable Asset Acquisitions," by Mark J. Silverman and Kevin M. Keyes. Court fines and judgments usually are the responsibility of the party in place — the seller — when the suit was first filed or when the action involved in the lawsuit occurred.
Items you will need
- Estimated costs of liabilities
- Lists of potential contingencies
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