Since there are no federal income taxes imposed on the purchase of a business, as the buyer of an existing company your focus may be on other areas, such as obtaining credit or valuing inventory.

Yet tax issues can impact your to-buy-or-not decision. Here are two examples.

  • Outstanding tax liabilities. It's generally true that when you buy the assets of a business (as opposed to the capital stock), you're not liable for prior debts. However, depending on the laws of your state, you could be responsible for unpaid sales, excise, or payroll tax.

    Steps to protect yourself include a signed statement by the seller about pending or ongoing tax disputes, notifying the appropriate state office of the purchase, and requesting a certificate or other verification from the state regarding investigations or delinquencies.

    You can also ask the seller to provide Form 8821, "Tax Information Authorization," so you can check tax records with the IRS.
  • Allocating the cost of assets. When you buy the assets of a business, you may be required to file Form 8594, "Asset Acquisition Statement," in the year of the purchase. Form 8594 shows how the sales price is split up between various types of assets.

    Why does it matter? Because different assets are treated differently on your new business's tax return. For instance, inventory can be written off as you sell goods, while noncompete agreements have a longer life.

Give us a call before you finalize that business purchase. We can help you structure the deal to your best advantage.

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