Start-up and Acquisition Costs after a Deal Falls Apart

 If you’re considering buying a business, it’s important to understand how the related investigation and acquisition costs are treated for federal income tax purposes—especially if a deal falls through. A recent example illustrates how these rules work.

Jim, an employee looking to become a business owner, spent $15,000 researching an industry and identifying a target company. Once he decided to acquire that business, he incurred an additional $35,000 in legal, accounting, and similar fees. When the purchase failed, the tax consequences depended on the nature of each cost:

• Initial investigation costs ($15,000). Because Jim never acquired the target business, his early research and start-up expenses are treated as personal and non-deductible. However, if he later buys a business in the same field, he may roll some or all of the costs into the new start-up and treat them as amortizable start-up costs.

• Acquisition-specific costs ($35,000). Professional fees incurred after Jim committed to the purchase must be capitalized. Since the deal collapsed within a year, he may treat these costs as a short-term capital loss, deductible against capital gains and up to $3,000 per year of ordinary income until fully used.

Bottom line. A failed acquisition can still produce valuable tax benefits. Start-up and transaction costs are handled differently, and proper classification helps ensure you capture all available deductions and losses. Your next step? Check out our Proactive Tax Strategy & Planning for Business Owners. While you're there, take the 2-minute Tax Strategy Assessment and get some free tax strategy ideas. Or reach out to us to see how we may be of service.

We provide these articles as general information and not individualized tax advice.  They do not constitute a client relationship with you, and any information provided here should be applied at your own risk.