With the aim of revitalizing the economy after the Covid crisis, the 2022 Finance Act introduced a temporary measure enabling tax deductions for the depreciation of goodwill acquired between January 1, 2022 and December 31, 2025. No extra-accounting reintegration is required for these funds. Article 23 of the law is intended to encourage the purchase or takeover of goodwill. But is the current sharp rise in interest rates changing the situation? Here's an update on the amortization of goodwill in 2023.
The rules previously in force
In accounting terms, the value of goodwill is recorded in an intangible assets account (account 207). ANC regulation 2015-06 of November 23, 2015 considers that the items in this account have, in principle, an unlimited life and are therefore non-depreciable. They may only be subject to impairment.
Companies considered small (fewer than 50 employees, sales of less than €12 million and balance sheet total not exceeding €6 million) may, however, amortize their goodwill over 10 years, regardless of whether use is limited or not.
The tax authorities do not follow the same rules. It automatically excludes all deductions for goodwill amortization, forcing the company to make extra-accounting reintegrations.
What is Article 23 of the 2022 Finance Act?
Article 23 of the French Finance Act for 2022 introduced an exceptional scheme to run until the end of 2025, enabling companies to deduct the depreciation of the business assets they purchase or take over from their taxable income. However, if the company only buys shares in a company, it will not be able to deduct anything.
This derogation from the principle of non-deduction of goodwill amortization is mainly of benefit to small businesses, subject to the conditions set out above. For example, small businesses may depreciate goodwill acquired between January 2022 and the end of December 2025 for accounting purposes over a 10-year period, without the need for any supporting documentation. This book amortization is tax-deductible.
The same applies to depreciation booked for all companies, regardless of size, for goodwill acquired between 2022 and 2025 and having a limited useful life.
How to buy a business despite high interest rates?
The advantage of buying or taking over a depreciable business right now, despite less competitive interest rates, is to reduce your taxable profit and therefore your corporation tax (IS). This is a significant tax advantage. It should be noted, however, that some business assets, such as patents and leasehold rights, cannot be depreciated.
The measure, which came into force in 2022, is currently designed to cope with rising interest rates, as the tax savings achieved by amortizing a fund outweigh the additional cost of higher interest rates.
As shares are not eligible for the deduction, buyers will prefer to acquire a business, which is not always the best option for the seller. The seller will therefore tend to increase the price of the business to compensate for the higher capital gains tax. This is one of the disadvantages of this system.
Another disadvantage, and not the least, is that by depreciating the business, the new buyer will have to pay a higher capital gain if he sells it after 10 years, unless he manages to sell only the shares, which is not guaranteed. The current profit can then be seen as a tax deferral.