If a target company in an acquisition has operating loss carry-forwards that cannot be fully utilized, the acquiring company can use them to reduce the tax bill of the combined firm.

Question

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Operating loss carry-forwards allow companies to deduct previous losses from future taxable income. If the target company has unused operating loss carry-forwards, they can be used by the acquiring company to offset their own taxable income, therefore reducing the tax bill of the combined firm.

If a Target Company in an Acquisition Has Operating Loss