3 tax considerations when purchasing a businessAs well as a lifestyle choice, the number one reason to purchase a business is the intention of making money. All too often buyers neglect to put any serious thought into downstream tax considerations, yet the easiest dollar your business will ever make is the dollars you save. Plan the purchase so as to minimise tax, particularly in the first year, when there may be unknown constraints on cash flow and a need for additional working capital.
Here are what Peter considers to be the 3 key points to bear in mind:
The valuation split.
When you buy a business, some of the purchase price is immediately tax deductible, some must be capitalised and depreciated over several years, and some of the cost may not be deductible at all. How the purchase agreement is worded will determine how the assets are valued for tax purposes, and how much of the purchase price will be deductible.
As a business purchaser, you want the stock value and asset values to be as high as possible, as these are deductible and depreciable. Conversely, it is highly desirable to have the value of goodwill as low as possible, as there is usually no deduction at all for goodwill. Obviously, if you are about to sell a business, the opposite applies: inflate the value of goodwill and minimise the value of stock and assets. This reduces the seller's tax liability (as depreciation recovered on the sale of assets and sale of stock are both taxable income).
It is also important that the business be purchased as a going concern. This allows GST to be zero-rated. A going concern means that you are purchasing a business, not just the assets of that business. To be zero rated, both parties need to be registered for GST. If you are selling a business, cover yourself by having the sale and purchase agreement state 'plus GST if any". This is one area where it really is worth consulting an experienced chartered accountant before signing the agreement. Even if the business is reasonably low priced, it is still money well spent.
A company structure offers some degree of protection of personal liability, and it is a structure that I almost always recommend business owners adopt. But if you are purchasing a business that is currently in a company structure (and you are buying the shares of that company), bear in mind that you will likely lose any imputation credits or losses brought forward that the company may possess.
Imputation credits are a credit the business receives from the IRD for any tax it has paid. These credits can then be attached to profits distributed by the company to its shareholders (dividends). Imputation credits prevent the company profits being taxed twice: once at the company level and again at the individual shareholders level. If by purchasing the business the company ownership is not maintained to a level of 66% or more continuity, then these credits are lost.
A similar situation applies with tax losses brought forward. Shareholding must be maintained at a level of 49% or more continuity. If not, the losses are lost.
Despite these factors, I still strongly recommend that if you purchase a business that is not incorporated, then incorporate it yourself as soon as possible. And apply to the IRD to have the company be a Loss Attributing Qualifying Company (LAQC). Form a company at www.companies.govt.nz. Then apply to become an LAQC, go to www.ird.govt.nz and download a form IR436 'Qualifying company or loss attributing qualifying company election'.
Peter Sibbald is a chartered accountant and author of 'Slash Your Taxes Now!' published by Reed Publishing.
Recommend this article:
- Business finance - borrowing the money
- Reducing business overhead costs
- End of financial year checklist
- Making the most of small business downtime
- Using the bank to arrange business finance
- Spring cleaning your business
- Financing a franchise, what the bank wants
- Financial tips for small business owners
- 3 tax considerations when purchasing a business
- Cashflow forecasts and liquidity
- Left Brain Right Brain, Financial Performance
- Using accounts payable to your advantage
- Cash flow financing or factoring finance
- Cloud commerce for business
- Avoid cyber attacks on your business