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Do you know what your creditor's tax consequences are if your company goes insolvent?

by , 13 November 2014
In this tough economic climate, running a business is hard. It's the reason so many businesses have to liquidate because they don't have the money to keep running.

But if you're in that position, you need to know what the tax consequences are before you make the insolvency call.

This particularly applies to your company's creditors, if you have any.

Read on to discover the tax consequences of insolvency when it comes to your creditors.

 
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Is your business insolvent? Here are the tax consequence for your creditors

 
If you owe an individual or business money but you're insolvent, they must 'prove' their claim if they share in any proceeds relating to the winding up of your affairs.
 
If your company's insolvent and a creditor makes a claim against you for money you owe, the proceeds aren't subject to tax in their hands. This is because both of you would've already included the underlying transaction in your taxable income (e.g. sales made on credit), or you would've related it to a transaction of a capital nature (e.g. in the case of a loan granted).
 
But if your company truly can't repay the money you owe, your creditors might be able to deduct the amount lost against their taxable income to reduce their tax bill.
 
This depends on the nature of the transaction, as well as the type of business that you're in. If the amount you owe them relates to a transaction they would've included in their taxable income, then they're entitled to deduct the loss. 
 
Now you know if you can't pay your creditors because of insolvency, they can claim the loss as a tax deduction which takes the pressure off of you and your ailing business. 
 
For more on tax and insolvency, check out the Practical Tax Loose Leaf Service
 

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