A company can undertake corporate restructuring to modify its organizational structure, operations, or financial structure. The main goal of restructuring is to make the company more efficient and profitable, improve its competitiveness, align its business activities with its long-term goals, and position itself for future growth and success.
How Does Company Restructuring Allow Companies to Become More Tax Efficient?
- Consolidate operations
By consolidating multiple business units or subsidiaries, a company can reduce administrative and overhead costs, which results in tax savings. For example, a company with several subsidiaries with overlapping functions can consolidate them to eliminate redundancies and reduce the overall tax burden.
- Change legal structure
Changing a company’s legal structure, such as converting from a C corporation to an S corporation, can result in tax savings. According to Forbes, S corporations do not have to pay taxes at the corporate level, which can result in significant tax savings for small businesses.
- Utilize tax incentives
Restructuring a business can enable it to take advantage of government tax incentives. For example, if a company is in a region offering tax credits for research and development, restructuring the company’s operations to focus on R&D activities can result in significant tax savings.
- Transfer assets
Restructuring a company can enable it to transfer assets to more tax-efficient entities. For example, transferring assets to a foreign subsidiary with a lower tax rate can result in significant tax savings.
- Reorganize debt
A company can optimize its debt-to-equity ratio and reduce its overall tax burden by restructuring debt. For example, restructuring debt to take advantage of tax-deductible interest can result in significant tax savings, observes a corporate tax expert at Hogan CPA Financial Services.
Different Methods of Business Restructuring for Tax Benefits
Some of the top methods of business restructuring for tax benefits include:
- Mergers and acquisitions
A business can take advantage of tax benefits such as carry-forward of tax losses and the ability to offset gains and losses between entities by merging with or acquiring another company.
A spin-off is when a company separates into two or more independent entities. The ability to offset gains and losses between entities can result in tax benefits, and there may be potential for the spin-off to receive tax-free treatment.
Divestitures involve selling off a portion of a business. It can result in tax benefits such as the ability to recognize tax losses and the ability to offset gains and losses between entities.
- Restructuring debt
A business can take advantage of tax benefits such as interest deductions and the ability to defer recognition of income by restructuring debt.
Reorganization involves changing the legal structure of a business. It can result in tax benefits due to the ability to defer recognition of income and the ability to offset gains and losses between entities.
Company restructuring can make businesses more tax-efficient by optimizing their operations, legal structure, assets, and debt to minimize their tax burden. However, it is important to note companies must restructure carefully and with the guidance of professionals such as tax advisors and attorneys to ensure that the restructuring is correct and complies with applicable laws and regulations.