Transaction/Financing Fees Tax Deductible?
Are transaction/financing fees deductible for U.S. tax purposes? I've seen it assumed both ways.
What about debt breakage costs?
Thanks
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What do you mean when you say you've seen it assumed both ways? There are certain circumstances when they are, others when they aren't.
Not the US, but in the UK, you can claim VAT back on certain transaction costs (advisers, etc) but amortised debt upfronts are not tax deductible
1) Financing fees are generally amortized and are tax deductible as they are rolled out. 2) Debt breakage costs are typically deductible. 3) 70% of success-based transaction fees are also generally deductible.
Providing a little more color -
1) This is true of OID as well 2) To clarify for OP, the most prevalent "breakage cost" is a call premium on early repayment of debt, which is usually somewhere from 0%-3%. This is fully deductible at the time it is paid. Companies can also deduct any unamortized financing fees and OID that remain on the balance sheet upon debt repayment (which would come with a change of control) (see 1) 3) 70% is the safe harbor for immediately deductible success-based fees (best example is investment banking transaction fee). For other, non success-based fees, (lawyer fees for example), deductibility is determined by a Bright Line Date, or a date in which a transaction becomes likely - usually the date of a signed LOI. Everything before the Bright Line Date is deductible, everything after is not. Please note that anything that is not immediately deductible gets put onto the balance sheet and is future deductible amortization just like financing fees.
How do you treat these transaction fees that are immediately deductible for the B/S impact? Do you still deduct the value of the 70% when calculating shareholder's equity for the transaction, and then do the remaining 30% sit on the B/S as an asset?
Is there a reason we never actually show the transaction expenses flowing through the PF model, and just make the adjustment to SE?
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