How are targets and acquirers taxed in each type of merger?

Jump to Solution
Category:

How are targets and acquirers taxed in each type of merger?

0
0

How are targets and acquirers taxed in each type of merger?

Explanation & AnswerSolution by a verified expert

Explanation

Taxability in each type of merger is as follows-

Non-taxable exchange of shares- Target company's shareholders who receive the shares in a post-merger company by handing in their shares in the target company do not have to pay any taxes during the merger. They benefit from the shares they receive in a post-merger company that produces synergistic gains. They only pay taxes on the capital gains when they sell the shares eventually. The acquiring company adds book value of the target company's assets to its assets and continues to depreciate them using the existing schedule. Hence, the acquiring company receives only a small depreciation tax shield and is taxable like pre-merger.
Taxable purchase of assets- When the target company receives the payment for the purchase, it pays the liabilities that the acquiring company has not acquired and pays corporate taxes on any capital gains from the sale of assets above their book value. The target company pays the remaining balance to its shareholders in the form of a liquidating dividend, and the target company dissolves. The acquiring company adds the appreciated value of assets to its books and depreciates the assets as if they are new. The increased depreciation reduces the taxable income providing tax benefits to the acquiring firm. The acquiring firm records the difference between the purchase price and the appreciated value of assets as goodwill in its balance sheet. Goodwill is amortized over a particular period of time, increasing amortization expenses in the income statement. The increased amortization expenses further reduce the taxable income.
Taxable purchase of shares- The target company pays the capital gains if the offer price is above the book value of its assets. If the acquiring company records the target company's assets at their book value, it continues to depreciate assets at their previous depreciation schedule. This does not lead to much increase in the depreciation expense; hence the effect on taxable income is significantly less. However, if the acquiring company records its assets at the appraised value, it pays the target company's tax liability on capital gains after the acquisition. The acquiring company adds the appreciated value of assets to its books and depreciates the assets as new. The increased depreciation reduces the taxable income providing tax benefits to the acquiring firm.

Sample Response

Taxability in each type of merger is as follows-

Non-taxable exchange of shares- Target company's shareholders do not have to pay any taxes during the merger. The acquiring company adds book value of the target company's assets to its assets and continues to depreciate them using the existing schedule. Hence, the acquiring company receives a small depreciation tax shield and is taxable in a manner similar to pre-merger.
Taxable purchase of assets- The target company pays taxes on any capital gains from sale of assets above their book value. The acquiring company adds the appreciated value of assets to its books. This reduces the taxable income providing tax benefits to the acquiring firm.
Taxable purchase of shares- The target company pays taxes on the capital gains if the offer price is above the book value of its assets. The acquiring company does not receive any tax benefits from the merger if it records the assets of the target company at their book value. But if it records the assets at the appraised value then it receives tax benefits by reducing taxable income.

Purchase this answer to view it. $5
Login/Sign up for free, load your wallet instantly using PayPal or cards and purchase this solution to view it.

Looking for the solution to this or another homework question?

If you need essay writing assistance or homework solutions, log in or sign up for a free account and ask our writers any homework question.