Tax Consequences of Purchasing a Business
If you are considering buying a business, you should be aware that it can carry significant tax implications. Thus, before you execute the purchase agreement, you should have one of our knowledgeable business attorneys review the seller’s financial records, including all applicable tax returns. Failure to do so could put you at risk for substantial tax liabilities, even years after the purchase date.
The purchaser of a business typically is not required to pay federal taxes on the purchase. The seller continues to pay the debts owed to the IRS, unless a federal tax lien has been placed on the business and it transfers with the sale. The buyer of the business is usually liable to pay state and local taxes, which can vary significantly depending on the structure of the business. Thus, before you purchase a business, it is important to require the seller to provide verification from the taxing agencies that all tax debts have been paid in full.
When a business’s equipment and other hard assets are purchased, how they are valued will determine whether the buyer or the seller is responsible for local and state sales and use tax liabilities. If the assets are valuable, the tax consequences for the buyer are lowered due to the buyer’s ability to take significant deductions on the depreciation of the assets. However, the seller may attempt to decrease the value of the business’s assets in order to reduce the tax liabilities on any assets sold in excess of their depreciated cash value. As a result, a buyer and seller must negotiate a just and reasonable price on the physical assets in order to decrease the tax consequences for both parties.
Employment tax laws differ by state and business owners can generally deduct them. The purchaser of a business can take advantage of employment tax deductions if the seller is retained by the entity as a paid employee. Thus, it is often wise for the buyer to negotiate a reduced purchase price for the business in exchange for a higher wage to the seller for his or her employment period.
Contact a knowledgeable business attorney at Nielsen Law Group for advice on buying a business, including the tax implications of your purchase. You can schedule your initial consultation by calling (480) 888-7111 or submitting a web request here.