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Tech startup A is capitalised with $1m. Burns through $1m, left with $0 in the bank, now has a million dollars in carry forward tax losses. That means you can m

Tech startup A is capitalised with $1m. Burns through $1m, left with $0 in the bank, now has a million dollars in carry forward tax losses. That means you can make a million dollars without paying taxes. At a 21% corporate tax rate, that's $210,000 in taxes you'd pay on a $1m profit if you didn't have the carry forward loss. How much are the shares of that shell worth if you can use the tax losses to offset profits of a different, profitable business? Somewhere between $0 and $210,000.

leetcrew 8y ago
sure, but aren't you still out the original $1mm? it looks like in your example you end up with $1mm, since you didn't have to pay tax on the profits of company B. but if you had just kept the original million and paid tax on B's profits, you would have ~1.8mm? or are you implying that you can buy company A for less than the market cap in the first place?
- charlesdm 8y ago
  Yes, the owners of company A can sell their shares to profitable company B for an amount between $0 and $210,000. Obviously you wouldn't burn a million to create tax losses. Remember: this company has $0 in the bank. It's essentially the same as a newly incorporated company, but with tax losses. There would generally be a discount on the value of the tax loss due to historical liability risks of the previous operating business. The things written above are highly simplified though, and might not give a completely accurate reflection of the situation. There are likely some anti avoidance rules in place to stop this behavior. But this again depends on the country. Billionaire John Malone (who hates taxes) talks a bit about tax in this business talk at a university: https://youtu.be/v5QfCLeloEg?t=2174 https://youtu.be/v5QfCLeloEg?t=2174. Also this: https://www.businessinsider.com/what-liberty-really-loves-about-sirius-tax-losses-2009-2?IR=T https://www.businessinsider.com/what-liberty-really-loves-ab... "There are some catches here. To use the NOLs (net operating losses), Sirius can't undergo a full change in control for three years. So Malone has to bide his time with his 40% for three years before scarfing up the rest of the company." This is one such anti avoidance mechanism. By being smart about taxes, he essentially got that business for free.
  - leetcrew 8y ago
    ah okay, thanks for the lesson.
- djajshgsjja 8y ago
  The person who buys the failed business is not the same person who put in the original $1M.

leetcrew 8y ago

sure, but aren't you still out the original $1mm? it looks like in your example you end up with $1mm, since you didn't have to pay tax on the profits of company B. but if you had just kept the original million and paid tax on B's profits, you would have ~1.8mm? or are you implying that you can buy company A for less than the market cap in the first place?

charlesdm 8y ago
Yes, the owners of company A can sell their shares to profitable company B for an amount between $0 and $210,000. Obviously you wouldn't burn a million to create tax losses. Remember: this company has $0 in the bank. It's essentially the same as a newly incorporated company, but with tax losses. There would generally be a discount on the value of the tax loss due to historical liability risks of the previous operating business. The things written above are highly simplified though, and might not give a completely accurate reflection of the situation. There are likely some anti avoidance rules in place to stop this behavior. But this again depends on the country. Billionaire John Malone (who hates taxes) talks a bit about tax in this business talk at a university: https://youtu.be/v5QfCLeloEg?t=2174 https://youtu.be/v5QfCLeloEg?t=2174. Also this: https://www.businessinsider.com/what-liberty-really-loves-about-sirius-tax-losses-2009-2?IR=T https://www.businessinsider.com/what-liberty-really-loves-ab... "There are some catches here. To use the NOLs (net operating losses), Sirius can't undergo a full change in control for three years. So Malone has to bide his time with his 40% for three years before scarfing up the rest of the company." This is one such anti avoidance mechanism. By being smart about taxes, he essentially got that business for free.
- leetcrew 8y ago
  ah okay, thanks for the lesson.
djajshgsjja 8y ago
The person who buys the failed business is not the same person who put in the original $1M.