What are Business Combinations? Understanding These Tax Laws

Business Combinations

A taxable combined business occurs when an investor entity (also known as an acquirer) gains control over a business and, in some cases, more than one business. An acquiring entity is interested in a combined company to eliminate competition and gain the financial benefits of larger production volumes. Entities also obtain combined businesses to evolve, diversify, and access new markets. 

Not every acquisition is a business combination; the outcomes of the acquisition method influence those that classify as such. When a business combination transpires, the controlling entity has the upper hand in the market because it has obtained more of it and, therefore, has an influential position within it. The tax structures that emerge because of combined businesses revolve around whether the joint companies are or are not taxable.

Tax laws of business combinations rely on outcomes of assessment methods outlined by the ASC. Reporting requirements also clarify the activities and liabilities affecting the combined companies. Consider the following information to learn about business combinations and relevant tax laws. 

Tax Laws For Business Combinations 

  • ASC 805-10, 20, and 30 outline steps to determine the accounting processes of a business combination. Start by verifying whether the acquisition can be considered a business combination by legal definition. 
  • The specific assets and activities acquired must qualify as a business combination based on the criteria in ASC 805. A series of steps is conducted via the acquisition method, an official way to measure the valuables within the acquiree. 
  • Calculating assets and liabilities informs companies of the leftover value of the intangible assets within their business combinations. 

Here are taxing basics: 

  • ASC 740 determines how companies decide how income taxes influence the GAAP-compliant financial statements they establish.
  • business combinations that directly acquire an outside entity (through asset acquisition) can be taxed 
  • combinations of share acquisitions are not taxable 
  • “taxable,” in this case, regards the imposing of tax upon the entity acquired via the sale of the entity get a business insurance.

Pushdown Accounting Basics 

Depending on the outcome of the acquisition method, the business combination will presume with pushdown accounting. Pushdown accounting carries out processes relating to the acquirer’s financial statement following the assessment phase. 

The acquiree can use pushdown accounting whenever an entity or another gains control of the combination and when there are financial statements before any independent report. Pushdown accounting may only take place after the issuance of financial statements. 

Reporting Laws By SEC 

The SEC demands that registrants file financial data about the recently acquired and soon-to-be acquired businesses and operations; this allows investors to get the financial information they need to understand a company’s notable activities. These legal requirements are outlined by the SEC in regulation files: 

  • S-X (for notable acquired businesses)
  • Rules 3-05 (for later acquisitions) 
  • 3-14 (for real estate acquirees and operations)

Protect Your Company By Following the Guidelines 

Following an acquisition merger, the conjoined business is tasked with accounting guidelines that comply with ASC 740. By understanding the tax influences, you can better protect your business combinations.

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