Define: Accrued Taxes
Accrued Taxes refers to tax liabilities that a business has incurred but not yet paid as of a specific date, such as a completion or closing date in an agreement. Contracts use this term to allocate responsibility for these unpaid amounts between parties, commonly in mergers, acquisitions, or asset transfers, ensuring clarity over who bears the outstanding tax burden.
Legal accuracy standard set & glossary spot-checked by Imad Mohammed Nazar , Skadden-trained M&A lawyer, Legal Engineer at GenieAI
What Accrued Taxes Means in a Contract
In a contract, Accrued Taxes describes tax obligations that have arisen through the ordinary operation of a business but remain unpaid at a particular point in time. This could include income tax, payroll tax, property tax, sales tax, or other levies that have been earned or become due under applicable rules, yet the actual payment to the relevant tax authority has not yet been made. The concept is distinct from taxes that are merely anticipated or contingent because accrued taxes reflect obligations that have already crystallized under accounting or statutory principles.
The term matters most in agreements that involve a transfer of a business, its assets, or its shares, because the parties need to agree on which entity is financially responsible for tax liabilities that existed before the transaction closed. Without a clear definition, disputes can arise over whether a buyer inherits tax debts that accumulated under the seller's ownership.
Accrued Taxes clauses often work alongside representations and warranties, indemnities, and closing adjustments, forming part of a broader financial reconciliation process that protects both sides from unexpected liabilities.
How Accrued Taxes Is Defined or Measured
Measurement of accrued taxes typically relies on accounting records, tax returns, and financial statements prepared as of a defined cutoff date, often called the effective date, closing date, or measurement date. Parties commonly instruct their finance teams or auditors to calculate the amount owed based on generally accepted accounting principles or another agreed accounting standard, ensuring consistency and verifiability.
Some contracts define accrued taxes narrowly, covering only taxes that have been assessed or invoiced, while others adopt a broader definition that includes taxes that have accrued in an accounting sense but have not yet been billed by the tax authority. This distinction is important because it affects how much liability transfers with the transaction.
- Taxes accrued but not yet due for payment
- Taxes due but not yet paid
- Estimated taxes based on partial-year operations
- Deferred tax liabilities in certain jurisdictions
Because tax rules vary, the specific calculation method should always be checked against the law governing the contract and any applicable accounting framework referenced in the agreement.
Where Accrued Taxes Appears in Agreements
Accrued Taxes clauses are common in share purchase agreements, asset purchase agreements, merger agreements, and joint venture agreements, where the allocation of pre-closing liabilities is a central negotiation point. They also appear in financial statements, disclosure schedules, and closing statements used to true up purchase price adjustments.
Beyond corporate transactions, the term surfaces in a dedicated Relevant Circumstances
Relevant Sectors