When you are buying a business you may incur various initial expenses before the transaction is actually completed. These costs include legal fees to draft a contract or expenses to carry out a due diligence audit of the acquiring business and other incidental costs. The due diligence audit will assist you to gain a greater understanding about the business’s prospective earning capabilities, the position and competency of management, who the company primarily deals with in regards to customers and suppliers, what assets and liabilities they have, as well as their financial position.
Generally, the various initial costs relating to the purchase of a business are treated as capital expenditure and, consequently, are not deductible under the general provisions of the income tax law. In certain circumstances, the purchase of the business may not eventuate at all. Nevertheless, you can claim deductions for business related costs in equal proportions over five years for certain capital expenditure you incurred. It is known as deduction for “black hole” expenditure.
Therefore, the cost of undertaking a due diligence audit or legal and accounting fees in relation to the purchase of the business may be deductible over five years. You must be able to show that you have real intention to acquire the business. You don’t need to be actually deriving income from the activity at the time the expenditure is incurred.
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