Tax Implications of Buying a Corporation
The acquisition of a corporation often carries a number of delicate negotiations. The buyer and seller not only may conflict over the value of the company, but also over how best to structure the sale. Sellers, for example, may prefer selling stock in the entire company, while buyers may prefer simply buying assets -- leaving liabilities in place and establishing a higher taxable basis. When acquiring a corporation, pay careful attention to the details of the business's tax structure, possible liabilities and how the sale is structured.
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Tax Liabilities
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If you buy a business lock, stock and barrel, you not only purchase all the business's assets, you also own all the business's liabilities, iincluding any outstanding tax bills. Before you purchase, look at the business tax returns for at least several years, including annual and quarterly returns. Also, go over the state and local income and sales tax records.
Basis
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When you purchase a corporation, you establish a taxable cost basis in the company. This is the amount of money you have invested in the business, including the amount you purchased your shares for as well as any subsequent contributions of capital to the corporation. When you sell the business, you should get up to your basis back, tax-free. Anything extra is a capital gain, to be taxed at capital gains rates. You only pay capital gains tax on profits, not on the total sales price when you sell the company.
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Returns
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When you own a corporation, you must file returns at least annually. For an S corporation, file a Form 1120S. For a C corporation, file 1120. If you have employees, you will also have to file a Form 941 - Employer's Quarterly Income Tax Return, which accounts for the tax you have withheld from employees to pay income and Social Security taxes.
Declaring Income
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The manner in which you must declare your income depends on what kind of corporation you own. An S corporation is a "pass-through" entity. That means the corporation does not pay income tax. Instead, profits "pass through" to your individual return, where they are taxed at your own income rates. C corporations, on the other hand, must declare income and pay the corporate income tax rate on profits, prior to issuing dividends. When you receive a dividend from a C corporation you pay taxes on that dividend, although dividends from a qualified domestic C corporation receive favorable tax treatment.
Asset Purchase Vs. Stock Purchase
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You can purchase a company by purchasing only its assets, or you can purchase a corporation by purchasing its stock. By making an election to treat the purchase of an S corporation as an asset purchase under Section 338(h)(10) of the Internal Revenue Code, you may be able to realize a step-up in cost basis on the assets - which will lower your ultimate tax bill when you decide to sell the company. Consult an experienced attorney or accountant with knowledge of corporate acquisitions to see how this election may benefit you.
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