KPMG report - Tax treatment of contingent consideration 

September 9:  Companies across all industries are routinely involved in business acquisitions (both taxable and tax-free) in which all or a portion of the purchase price may be contingent upon one or more future events.

In many circumstances, a portion of the amount that is nominally considered part of the purchase price in the agreement, when and if paid to the seller, is required to be recharacterized by the buyer as interest expense under the imputed interest rules of section 483.

The result to the buyer is typically favorable in that the resulting unstated interest expense may be currently deducted in the year paid—rather than being capitalized as part of the purchase price of the assets of the business.

The deferred payment rules of section 483 provide for this treatment even though the additional consideration, because it is contingent and subject to the terms of the sales contract, is not considered to be a loan or debt instrument issued by the buyer to the seller. Section 483 can be applied if identified at the time of the transaction, or it can instead be applied later in the process via a change in accounting method.

As discussed in a KPMG report, the tax treatment of contingent consideration may yield an often-overlooked opportunity for the buyer, in the form of a deduction for unstated interest.

Read the September 2013 report [PDF 266 KB] prepared by KPMG LLP: What’s News in Tax: Consider the Consideration

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