May 7, 2010
Paying Sales Taxes When You Buy A Business
Paying Sales Taxes When You Buy A Business By Cliff Ennico www.creators.com "I recently bought a small business. During a routine sales tax audit, the auditor mentioned that when I bought this business I should have paid sales tax on the entire amount of the purchase price. This came as a huge shock to me, as the attorney who represented me said nothing about it. I had to pay several thousand dollars in taxes, plus interest because I paid it late. Is this correct, and is there anything people can do to avoid such a rude surprise?" The problem here comes about because nowadays when people buy businesses, they don't purchase the stock of the seller's business - they buy the assets instead. Many states require you to pay sales tax upon a "bulk purchase" of assets, and the tax bill can come as a huge surprise if you don't plan for it. Whenever you buy the assets of a business, you are required to "allocate" the purchase price to different assets - so much for equipment, so much for inventory, so much for goodwill, and so forth. This is done primarily for income tax purposes - because different assets classes are treated differently for tax purposes (some, such as equipment, are fully deductible, whereas goodwill must be written off over 15 years, for example), the IRS and your state tax authority want to know how much of the purchase price was used to buy specific assets. If you bought this business during 2009, you will have to file IRS Form 8594 (available as a free download at www.irs.gov ) on your tax return next year spelling out how you did this. But the allocation of your purchase price for income tax purposes also determines how much sales tax you pay to your state and local tax authorities. Generally, there is no sales tax on "goodwill" or other intangibles. When you buy the assets of a business, only that portion of the purchase price that is allocated to "tangible assets" such as equipment is subject to sales tax. So, when allocating the purchase price in your contract of sale, if you want to minimize sales taxes you should allocate as little as possible to equipment and other tangible assets. But that decision will come at a price: the less you allocate to equipment, the less you will be able to deduct on this year's tax return under Section 179 of the Internal Revenue Code, which currently allows you to write off up to $250,000 worth of equipment in the year you buy it. When allocating your purchase price, you may have to pay some sales tax in order to get the benefit of a hefty income tax deduction - your accountant should work through the numbers and figure out what will give you the biggest "bang" for your tax dollar. Which leads me to the big problem here: it sounds like you didn't have an accountant working with you. Many attorneys who represent small businesses are not familiar with the tax consequences of the transactions they put together for their clients - they rely on your accountant to handle this, and the better ones will not agree to work with you unless you have an accountant they can work with to make sure you experience no tax "surprises" after the closing takes place. Unfortunately, quite a few attorneys won't even tell you to get an accountant - if that's what happened here, then I don't think your attorney acted properly. If an attorney is not willing to get involved in tax issues, then he or she has an obligation to insist you work with a good small business accountant. If your attorney doesn't want to work with an accountant, or if you refuse to work with one because of the cost, then he or she has an obligation to help you deal with the tax issues of your transaction or (if he or she is not comfortable doing so) withdraw from representing you. Period. Here's a tip: when a seller of assets wants to allocate a large amount of your purchase price to tangible assets (which will result in a big sales tax bill for you as the purchaser), ask him to break the figure down into two categories: "equipment" and "leasehold improvements" (or "capital improvements" if you are buying the building where the business is located). While "equipment" will always be considered "tangible assets" for sales tax purposes, in many states "leasehold improvements" are considered intangible assets that are not subject to tax. Or they may be considered the property of your landlord, not you individually, and will be exempt from tax for that reason. You will still end up paying some sales tax, but the amount will be greatly reduced. When buying any sort of business, you need both a good lawyer and a good accountant - using only one type of professional ensures that some things will "fall through the cracks," as they did here. Cliff Ennico ( cennico@legalcareer.com )is a syndicated columnist, author and former host of the PBS televisionseries 'Money Hunt'. This column is no substitute for legal, tax orfinancial advice, which can be furnished only by a qualifiedprofessional licensed in your state. To find out more about CliffEnnico and other Creators Syndicate writers and cartoonists, visit ourWeb page at www.creators.com or visit succeedinginyourbusiness.com .COPYRIGHT 2009 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE,INC. Permission granted for use on DrLaura.com.

Posted by Staff at 1:52 AM