Elon Musk talks and tweets a lot about taxes, from how much he should pay on selling Tesla stock to high California taxes and why he moved himself and Tesla to Texas. But as the economy sours and the mudslinging grows worse, how could taxes play out in his on-again, off-again bid to buy Twitter?
In a match as ill-fated as the Johnny Depp – Amber Heard drama, the famously feisty Musk has tried to back out of his $44 billion deal to buy the social media platform. Now, Twitter, which announced its quarterly earnings on Friday, is taking Musk to court in a lawsuit aimed at making the mercurial billionaire make good on his deal.
Was there a tax deduction anywhere in that $44 billion deal?
Win, lose or settle, the tax implications are many and complicated. Whether Musk, as the payor, can deduct the deal breakup fees as a business loss or expense depends on the details.
So how did it go so wrong?
First, there was the offer by Musk to buy the social media giant, the employee and public outrage, the pushback and more. Eventually, there was a deal struck for the world’s top billionaire to pay $44 billion for the platform. But then Musk complained about bots and a lack of proof of just how many accounts was he buying anyhow.
Meanwhile, the economy wasn’t exactly improving, so some say that Musk was haggling to renegotiate. Then, Musk killed the deal, calling off his whopping purchase both publicly and in a Securities and Exchange Commission filing.
Like clockwork, Twitter cried foul and sued. It’s facing up to be quite a battle. There was a kill fee in the deal, kind of a $1 billion nonrefundable deposit if Musk called it off. Musk and Twitter agreed that if either party chose to withdraw from the deal, that party would have to pay a fine of $1 billion.
Musk’s lawyer, Mike Ringler, stated that Must called off the deal because Musk does not believe that Twitter provided adequate information about how many fake and spam accounts populate the platform. In a letter to Twitter, Ringler claimed that the company was in “material breach of multiple provisions” of its agreement with Musk.
Despite the negotiated price tag, Musk says Twitter failed to provide all the information it was required to provide, and that should let him off the hook without a payment. It’s been the deal of the year, with many for and against votes and a media firestorm from throngs who were horrified or delighted that Musk was plopping down billions to take on Twitter.
When you buy something, you have a basis in your purchase, but no deduction. In fact, in corporate deals of this sort, even the legal fees have to be capitalized and added to the purchase price. That is so even though in business, most legal fees are fair game to claim as business expenses.
But what happens when Musk backed out? The tax law says he can write off the $1 billion fee if he has to pay it. And he can write off all the legal fees he is incurring in the big lawsuit Twitter just filed too. Not only that, but all those legal fees and other deal expenses that he could not deduct while his Twitter deal was active are now suddenly deductible. IRS rules require those costs to be capitalized while the deal is negotiated, documented and closed. But if the deal is scuttled, there is no asset to capitalize the expenses too, and you can write them off.
Termination fees are paid when a deal does not happen. This means capitalization is usually irrelevant. If the would-be acquirer drops a few billion when a court blocks a proposed merger, it will usually have no problem deducting the cost of the breakup. However, in some cases, a fee paid to terminate one deal can be characterized by the IRS as a cost of carrying out a second transaction. That can trigger tax rules that require capitalization of costs that facilitate the acquisition of more than a 50% interest in a business entity.
We’ll know more about how this may play out sooner than Musk wanted as Twitter won its bid for a quick trial, which is set to take place in a Delaware court over five days in October. Stay tuned.