To save business transmissions during the COVID crisis, the 2022 finance law offered companies the possibility of deducting the depreciation of business assets from their taxable income. Mohammad Patel, partner Walter France, explains the benefit of this measure and the precautions to take.
Before the 2022 finance law, whether a buyer buys the shares or only the business, the rule was the same : it was impossible to amortize the fund for tax purposes. Today, if he buys back the shares, he still can't deduce anything. On the other hand, by purchasing only the business, being able to amortize it over ten years will, mechanically, reduce its profit and consequently its corporate tax. Taking the example of a business purchased for a million euros, the tax gain can reach 250,000 euros. Be careful though, to benefit from this measure, the company must be below two of the following three thresholds : 6 million euros in balance sheet total, 12 million euros in turnover and 50 employees.
A measure that will end in December 2025
This is a temporary system which must end in December 2025. It motivated certain sellers to anticipate the sale of their business to optimize the sale price. Some experts believe that the said device could be transformed into a definitive measure. To be continued…
Being able to buy despite the rise in rates
When the legislator opened up the possibility of amortizing business assets, he didn't know that, two years later, interest rates would rise sharply. Today, this measure makes it possible to cope with this increase. Taking the same example of a business purchased for a million euros, the total additional cost linked to the increase in interest rates on a basis of 1,5% to 4% amounts to almost 95,000 euros, for a tax saving linked to the amortization of the fund of 250,000 euros. The seller, on the other hand, often has an interest in selling shares, whose capital gains regime is generally more favorable, particularly if the shares are held by a holding company. So that the seller and the buyer each find their account, they could agree that the seller sells his fund, and not the shares, but more expensive… The risk is therefore to create inflation on transfers of funds.
The exemption from capital gains on sale for “small” funds remains relevant
This “windfall effect” for the buyer is added to another pre-existing measure not limited in time for the benefit of the seller : exemption from capital gains on sale for small businesses. This measure was significantly reinforced by the 2022 finance law. Remember that the exemption is total for a sale price not exceeding 500,000 euros and partial up to 1,000,000 euros., or if the manager retires within the limit of a transfer price of 500,000 euros. The activity must in particular have been carried out for at least five years, and selling to oneself is always prohibited.
BE CAREFUL TO TAKE INTO ACCOUNT ALL THE IMPACTS OF THIS “BINDING EFFECT”
The buyer must take care to break down the elements that can be depreciated from other assets that cannot.. for example, patents, licenses and right to lease, among others, are excluded from this temporary system. Precision is essential so that the tax administration cannot contest the depreciation.
The fact of amortization is certainly interesting in terms of cash flow, but from an accounting point of view, this leads to reducing the result, or even make it in deficit. In this case, it is impossible to distribute dividends. otherwise, banks will refuse financing for the recovery, and this even if the operation is economically viable.
If the acquisition price was high because of the tax savings linked to the depreciation of the fund, at the end of the amortization period, the value of the fund could fall. Or, banks often take the fund as collateral when making a loan. So that this guarantee is tangible with the banks, the value of the fund must be consistent with the future value of the fund without amortization.
In terms of taxation, if the buyer buys the fund for one million euros without amortization, and he resells it for the same amount ten years later, he will not pay capital gains. On the other hand, if it amortizes, and that he sells the fund after ten years, the added value will amount to 250,000 euros. In this case, it benefits from a simple deferred tax payment and not from a real saving. Except, of course, if he can sell the shares of the company and not his business. Indeed, a holding company that sells its equity securities is subject to the special tax regime for long-term capital gains : corporate tax only applies to 12% of the total amount of the capital gain, i.e. an effective tax rate of 3%. In which case, he’s a winner all round !
However, the future buyer may very well not accept. Indeed, the repayment of the existing loan of this company often consumes most of the cash generated by the activity ; and the distribution of dividends to the partner to enable him to pay his loan taken out for the acquisition of the shares is limited due to the lack of distributable income due to the impact on the accounting income of the amortization of the fund.
Final warning : it is not possible to sell to yourself and use this depreciation measure by having the business purchased by another company owned by the same person.
