An acquisition of a company may involve two primary methods: stock purchase or asset acquisition. In this regard, it is imperative to note that asset purchase is mostly preferred by organization because it does not have to cater for the liabilities of the selling firm. On this note, buying the assets means that the acquiring corporation leaves the selling corporation with the liabilities. However, purchasing stock means that the acquiring company will also buy the liabilities, which may include some unknown liabilities. However, asset acquisition is affected by the taxation policy of the country. In this regard, the buyer is favored by the tax system of a country on a number of factors.
In relation to treatment of acquired assets by Company A, the organization for tax purpose may prefer to pay cash on the asset acquisition. On this note, the acquirer is required to document the assets at the standard market price following the allocation rules. Therefore, company A will benefit on the basis that it has the opportunity of creating larger amortization and depreciation expenses and thereby reduce the taxable income and the due taxes. Succinctly, Company A will benefit from reduced taxes, which is crucial in ensuring that it can capitalize on the value of the assets.
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On the other hand, the selling company pays taxes on the assets on two levels. One of the levels is associated with the gain derived from selling the assets. Most jurisdictions have policies that mandate the selling company to record the amount of money derived from the transaction as a gain, which must be taxed. In addition, the sale must be documented in fair market value, which means that it must include the standard market prices. Furthermore, Company B will have to record the excess of the standard market value of the assets, which must be recognized as a tax cost.
However, Company B’s treatment of its shareholders may have some benefits to the firm’s stakeholders. Tersely, the shareholders are likely to benefit for tax purposes in the event that the firm had net operating loss carryovers, which the firm may apply to offset the built in gain derived from the sale of the assets. In this regard, if the company had net operating loss, it can use the funds from the asset sale to offset the deficit and this will not be considered as taxable amount. Subsequently, the shareholders will not have their dividends taken up by the taxes that the company will have to pay because it has already been recorded as part of the operational earning of the company.
Since Company A is not buying the stocks of the company, it does not have to offset the obligations of Company B. Nevertheless, the gains from the sale of the assets will be used to cater for the carry forwards of Company B’s net operating loss, which means that the sale of the assets will be taxed as a single entity. Concisely, the amount of tax that the seller will incur will not be treated as different entities from the organization’s operations and asset sale. Instead, they will be treated as a single taxable item. However, this situation usually works when the seller has a high value derived from such factors as unrealized intellectual property value although it has been incurring losses in recent years.
