PrintInstead of starting from scratch, you can usually find someone with a business who wants to sell. Buying an established enterprise may be more costly, but it's less risky than starting a new one. There's a lot to be said for a proven idea and taking over an existing customer base and location.
No federal tax is due when you buy a business, but buyers do have tax concerns, including some you won't face if you start from the ground up. For example:
- Outstanding tax liabilities that you may acquire along with the business
- Potential tax audits and bills for years before you took over the business
Whether you want to acquire a service, retail, wholesale, or manufacturing business, the tax issues are remarkably similar. Once you understand them, you must ferret out any undisclosed problems. Here are some steps that will help you minimize potential tax problems:
Get Professional Advice
Undisclosed debts, overstated earnings, poor employee relations, overvalued inventory, and pending lawsuits are just a few of the problems that can arise when you buy an existing business. Hidden liabilities can exist in all sorts of areas — from land contaminated with toxic chemicals, to accounts receivable that look solid but prove to be uncollectible, not to mention defected or outdated inventory.
A business-savvy attorney should be on your team for all but the smallest business acquisitions. A lawyer can represent you or just act as your coach. She can act as an escrow agent or recommend a company to handle the exchange of money. Some attorneys are not as familiar with the tax aspects of business transfers as they should be, so it may be a good idea to run the deal by a tax pro.
If you are buying a business for more than the value of its "hard" assets, consult with a business appraiser. It is preferable to find someone with experience in valuing businesses in a given industry.
Buying a Business in a Nutshell
- You and the seller must assign a value to all business assets transferred and report these to the IRS.
- You can write off goodwill and other intangible business assets purchased over 15 years.
- Beware of outstanding tax liabilities, always check for tax liens, and require the seller to agree to indemnify you for any tax debts attached to assets that you're buying.
- There is no federal tax on the purchase of a business, but states and localities may impose transfer taxes.
Paying Taxes
The state, county, or city where the business or its assets are located may impose a transfer tax on either the buyer or the seller. This is common whenever real estate changes owners. If the tax is on the seller, then your agreement should provide that it be paid out of escrow at closing. Be aware that if the seller doesn't pay, the taxing agency can usually come after you or the business assets.
Also, some states or localities impose taxes, such as annual personal property taxes, on business fixtures and equipment or on the business's inventory. Make sure that these types of taxes are not delinquent, or are paid at the time of closing; if they are not, you may inherit them.
For more information, see Tax Savvy for Small Business, by Attorney Frederick W. Daily.
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