Legal Definitions - carveout

A "carveout" is an explicit exception to a broader rule, agreement, or statute. In tax law, it specifically refers to the separation of income derived from property from the property itself for tax purposes.

A "carveout" refers to a specific provision that creates an exception or exclusion from a broader rule, agreement, or asset pool. It explicitly sets aside certain items, rights, or obligations that would otherwise fall under the general scope of the main arrangement. In a tax or financial context, it can specifically mean separating an income stream or a particular asset from a larger property or transaction for distinct treatment.

Here are some examples illustrating the concept of a carveout:

• Merger and Acquisition: When a large technology company acquires a smaller startup, the acquisition agreement might include a carveout. For instance, the acquiring company might agree to purchase all of the startup's assets and intellectual property, but explicitly exclude a specific, non-core software patent that the startup's founder wishes to retain for a separate venture.

  Explanation: This illustrates a carveout as an explicit exception (the specific software patent) from the broad rule (all assets of the startup are acquired).

• Government Regulation: A new environmental regulation is passed, requiring all manufacturing plants in a state to install advanced air filtration systems by a certain deadline. However, the regulation includes a carveout for small businesses with fewer than 20 employees, granting them an additional two years to comply due to potential financial hardship.

  Explanation: Here, the carveout is an exception (small businesses) to the general rule (all manufacturing plants must comply by the initial deadline).

• Real Estate Transaction (Tax/Financial Context): An individual sells a large commercial property that includes several leased retail spaces. The sales contract contains a carveout stating that the seller will retain the right to collect all rental income from one specific, long-term tenant for the next three years, even though the ownership of the entire property has transferred to the buyer.

  Explanation: This example demonstrates a carveout where a specific income stream (rental income from one tenant) is separated or excluded from the general transfer of property rights and income, aligning with the financial aspect of the definition.