Tax Angles and Pitfalls of Buying a Business
© by Fred W. Daily
Instead of starting from scratch, you can usually find someone with a business
who wants to sell. Buying an established enterprise may be more costlybut less
riskythan starting a new one. Theres a lot to be said for taking over a proven
operation, with a customer base and established location.
No federal tax is due when buying a business, but buyers face tax concerns
different from those who start from the ground up. Watch out for outstanding tax
liabilities that come with the business, and potential tax audits of the business for
Whether you want to acquire a service, retail, wholesale or manufacturing
business, tax issues are remarkably similar. Once aware of them, you must ferret out any
tax land mines and protect yourself. Buyers should get professional advice. You should
worry about undisclosed tax and other debts, overstated earnings, poor employee relations,
overvalued inventory and pending or potential lawsuits, to name a few.
Hidden liabilities can lurk in all areas from land contaminated with
toxic chemicals to accounts receivable that prove to be uncollectible or inventory
thats defective or dated. A business-savvy attorney should be on your team for all
but the smallest business acquisitions. A lawyer can represent you or just be on call to
answer questions. She can act as an escrow agent or recommend a company to handle the
exchange of money. Many attorneys are not familiar with the tax aspects of business
transfers, so run the deal by a tax pro, too. Keep in mind that if a professional advisor
makes a mistake, he or she may be liable for any losses you suffer as a result of the bad
advice. If you are buying more than just a business "hard" assets, consult
a business appraiser, too. Find someone with expertise in valuing businesses in the same
Here are the top four tax things a buyer should know:
- A buyer and seller must assign a value to all business assets, transfer and
report it to the IRS on their respective tax returns. Since the
Seller may have opposing tax interests, a Buyer should get help from a tax pro before
making the valuations final.
- A buyer can tax deduct "goodwill" and other intangible business assets
purchased, but it will take 15 years to get the full tax benefit. So, apportion as little
as possible to goodwill when valuing assets.
- Buyers should be wary of outstanding tax liabilities. Always check for tax
liens, and require the seller to agree to indemnify you for any tax debts that may attach
to assets transferred.
- While there is no federal tax on the purchase of a business, states and
localities may impose transfer taxes. Check it out before you make the deal, especially if
real estate is part of the deal.
Actually we have just scratched the surface here. For details, see Tax Savvy for Small Business (Nolo Press) Available
at major booksellers and online at Amazon.com.
By: Frederick W. Daily, Tax Attorney,
John Raymond, Bankruptcy Attorney, and
Allan H. Rosenthal, paralegal.
All of the three have offices in San Francisco.
(This article was originally written for tax
practitioners who represent clients before the IRS. But the information
presented here is valuable for all taxpayers.)
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