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.
"You’d be stupid not to try to cut your tax bill and those that don’t are stupid in business"
- Bono: U2