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Lowering Your Risk May Pay Off at Tax Time

Companies may be able to earn tax deductions on spin-offs now.

Former tax law interpretations meant that a corporation which wanted to reduce the risks one division created by transferring them to a subsidiary could not deduct the associated costs of "distributing shares as part of the transaction," CFO Magazine reports.

However, a recent Internal Revenue Service ruling means the spin-off expenses may no longer be taxed to the new shareholders and the corporation, according to the news source. Previously, spin-offs could not be deducted because the method was not the only way the corporation could have served the "business purpose."

The IRS determined in a letter ruling that if a corporation chooses to spin off its "qualified subchapter S subsidiaries" and distributes stock in one of the subsidiaries in exchange for shares of the corporation, the transaction would effectively make the subsidiary an independent company. The newly established company would acquire all of its assets and liabilities, making the costs that participants incurred during the spin-off a "genuine business purpose" - not a tax evasive strategy - and therefore eligible for deduction from taxable income, the news source reports.

One company that may be engaging in a tax-free spin-off soon is Ralcorp Holdings, which owns Post Foods. The company's board of directors recently announced it would be separating the two entities after it receives an IRS-issued ruling on whether the transaction will be free of taxes.