Tax Savings Strategy 204 | Purchase Loss Company

• Purchasing a loss-making business means the purchase price is low (so the business can be more easily funded).
• The purchase price is often just the value of stock and equipment (with nothing for goodwill).
• The business is normally very poorly managed so has the potential for rapid improvement.
• Access accumulated tax losses to shelter future business profits.

As taking ownership of the company structure will involve a change of control, the purchaser must ensure the ‘similar business test’ is passed, or the accumulated tax losses will be lost. Generally, a company satisfies the similar business test if it carries on a similar business in both the year the losses are absorbed and the time immediately before the change of ownership.
When purchasing control of a company the purchaser needs to consider the risk of undisclosed liabilities, future legal action, or tax liabilities. This makes the due diligence process and vendor warranties doubly important.