What is 'Basket Deductible'

A basket deductible is a single deductible that is designed to pay for losses from different types of risks. A basket deductible is designed to reduce the risk associated with business transactions, such as the purchase of another company, by outlining indemnification and indicating the point at which the seller may be responsible for claims.

BREAKING DOWN 'Basket Deductible'

A basket deductible limits indemnification obligations to prevent an indemnifying party from being liable for inaccuracies in or breaches of certain representations until losses exceed a specified minimum amount.

Businesses may agree to use a basket deductible when going through a merger or acquisition. The size of the basket deductible is determined during the purchase process and is often included in the purchase agreement. The use of a basket makes the purchase process smoother by including all the different risks inherent in purchasing another company and provides a level of protection to the seller. The party selling the business wants a high deductible because it reduces its exposure to losses from claims, while the buyer prefers a lower deductible because it wants to use the amount in the bargaining process.

Basket deductibles work by combining the different material risks that a buyer may experience from claims made after the purchase is complete, called post-closing claims. If the specific amount of deductible is not reached, then the buyer is responsible for the cost of the claims. If the amount of claims exceeds what the buyer and seller agreed to, the buyer may pursue a refund from the seller for the excess loss.

Basket Deductibles vs. Tipping Deductibles

Basket deductibles differ from tipping deductibles, which may also be used in acquisition agreements. Once a specified limit is reached in an agreement featuring a tipping basket, the seller will be responsible for all claims, not just the claims up to a certain point. For example, several months after purchasing a business the buyer believes that there are $600,000 worth of claims that the seller should be responsible for. If a basket deductible with a limit of $500,000 is used, the buyer is only able to pursue the seller for additional funds if total claims exceed $500,000. In this case, $100,000 ($600,000 in claims less the $500,000 deductible limit). Any amount over $500,000 would be the responsibility of the seller. In the case of a tipping basket with a limit of $500,000, any claims that bring the total to a number over $500,000 would require the seller to pay the entire claim. Since the claims total to $600,000, the seller would be responsible for all $600,000.

RELATED TERMS
  1. Deductible

    For taxes, a deductible is the expenses subtracted from adjusted ...
  2. Tax Deduction

    A tax deduction lowers a person’s tax liability by lowering his ...
  3. IRS Publication 936

    A document published by the Internal Revenue Service (IRS) that ...
  4. Schedule A

    Schedule A is a U.S. income tax form that is used by taxpayers ...
  5. IRS Publication 529 - Miscellaneous ...

    IRS Publication 529 - Miscellaneous Deductions details which ...
  6. Domestic Production Activities ...

    The domestic production activities deduction was intended to ...
Related Articles
  1. Taxes

    An Overview of Itemized Deductions

    Itemized deductions will mostly stay the same for 2017 tax year (medical deductions improve under the new tax bill). Big changes start in 2018.
  2. Taxes

    Why You Should Itemize Your Tax Deductions

    This strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
  3. Taxes

    Do Your Research Before Claiming These Deductions

    Be sure to read the fine print about any deduction or credit that you’re planning to claim.
  4. Taxes

    Increase Your Tax Refund With Above-The-Line Deductions

    Find out about these deductions and how you can use them to lower your tax bill.
  5. Taxes

    10 Tax Benefits for the Self-Employed

    Running your own business has both personal and financial perks.
  6. Financial Advisor

    20 Medical Expenses You Didn't Know You Could Deduct

    These commonly overlooked medical tax deductions could lower your tax bill, especially since medical expenses need to be only 7.5% of your AGI in 2018.
  7. Taxes

    Calculating the Mortgage Interest Tax Deduction

    The amount of money you save by paying your mortgage off quickly will far exceed any benefit from the mortgage interest tax deduction.
  8. Taxes

    How To Deduct Your Job Search Expenses

    With approximately 12 million Americans out of a job right now, many people are spending significant dollars to be noticed by potential employers. Fortunately, some of these job-search costs ...
  9. Taxes

    Who Loses Under the New Tax Provisions? Homeowners

    The tax code overhaul reduces the tax advantages of owning a home.
  10. Taxes

    5 Overlooked Tax Deductions for Small Businesses

    It's easy for small business owners to miss a few tax write-offs. Here's where to find them.
Trading Center