Tax Implications of Buying a Business

Tax Implications of Buying a Business

Asset Purchase vs. Stock Purchase

Asset Purchase (Buyer Prefers)

• Buy specific assets: equipment, inventory, goodwill, customer lists
• Buyer gets a stepped-up basis — depreciate everything at current values
• Avoids the company's historical liabilities
• Seller may face higher taxes (ordinary income on some assets)

Stock Purchase (Seller Prefers)

• Buy the ownership interest directly
• Buyer inherits existing tax basis (no step-up)
• Buyer assumes all liabilities, including unknown ones
• Seller pays capital gains rates

Section 338(h)(10) Election

Allows a stock purchase to be treated as an asset purchase for tax purposes if certain conditions are met. Can give the buyer the depreciation benefits of an asset deal.

Allocating Purchase Price (Form 8594)

Buyer and seller must agree on how the purchase price is allocated among asset classes (the allocation affects both parties' taxes).

Asset classes (from most to least advantageous for buyer):

1. Inventory (COGS deduction)
2. Equipment (rapid depreciation via Section 179)
3. Section 15-year property (buildings and land improvements)
4. Intangibles (goodwill, customer lists: 15-year amortization)

Due Diligence Tax Issues

• Unfiled returns
• Payroll tax liabilities
• Uncollected sales tax
• Pending audits

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Acquiring a business? Tax analysis of the deal structure can be worth hundreds of thousands.