Buying or selling, CPAs must know the details: here's how to make the right tax choices in the purchase or sale of a business.

In making an acquisition or disposition of a corporate business, a thorough analysis is necessary to adequately advise clients and senior company management.

Taxpayers selling a business must ensure that all tax, accounting, and operational considerations have been addressed. The seller should attempt to foresee what items and business areas would be important to a potential buyer. For example, the buyer of a corporate business relies greatly on the seller's financial statements.

To a large extent the sale price is determined on the historical information found in these financial statements. If the seller's financial statements have never been audited, or have not been audited within the past six months, an audit should be considered to allow for an accurate presentation of current financial information.

Some other items that may be important:

* The payment record of federal taxes

* State income tax

* Sales tax 

* Franchise tax

* Stamp and transfer taxes

* Contractual obligations

* Title restrictions on property

* Registration of patents; trademarks; trade names and copyrights

From the buyer's standpoint, appropriate "due diligence" procedures must be performed to ensure that the transaction is structured properly, the purchase price is not overstated, and all potential liabilities have been identified.

From a tax perspective two considerations are of paramount importance: Should the transaction be structured as a sale of stock or assets?. And, should the transaction be structured as a taxable or tax-free acquisition?

For the buyer of a business an acquisition of assets is generally preferable to the acquisition of stock. For example, an asset acquisition allows the buyer to purchase specific assets of the corporation. The segregation of specific assets with a stock sale is difficult.

The buyer can also "step-up" the tax basis of the assets in an asset purchase to increase depreciation deductions. Furthermore, an asset acquisition allows the buyer to purchase the assets without regard to contingent or unknown liabilities.

For the seller of a business, a stock sale is generally preferable to an asset sale. A stock sale is generally a simpler transaction to consummate. The sale of stock by the shareholders generally results in a capital gain, while the sale of assets by the corporation can result in significant ordinary income. Furthermore, unlike a stock sale, an asset sale triggers both a corporate level tax and a shareholder level tax.

Olson is a Principal with UHY Mann Frankfort Stein and Lipp Advisors Inc., Houston. This is adapted from "Tax Consequences of the Purchase and Sale of a Business."

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