TAX HIGHLIGHT
Selling Your Business ? Avoid These State and Local Tax Pitfalls
M & A SERIES
Selling your business can be a lucrative and life-changing decision , so it ’ s essential to navigate the entire process carefully to avoid any tax pitfalls . One of the most overlooked areas in the due diligence process of a transaction often falls within the tax realm , especially on the state and local tax side .
Just as you are looking to maximize your purchase price , state and local jurisdictions are also looking to collect revenue from your transaction activity . Proper planning and understanding of these tax implications can help your transaction value of the sale while minimizing your tax liability .
State and Local Tax Pitfalls to Avoid
Some of the most common state and local tax pitfalls often seen in the due diligence process include :
• Income Taxes Not all states follow federal flow-through , which creates a misconception that there are no income tax due diligence concerns .
It can be increasingly complicated as your business activities expand across more states . A buyer / investor will want to know where business activities are occurring , where employees and customers are located , what types of business activities are happening and whether returns are being filed where required .
Once business activity occurs outside your home state , a S corporation or partnership could be liable for taxes , either through a composite filing ( like in Indiana ), or through withholding payments , if you have a certain level of activity within that state ( California , for example ). Also , some states tax S corporations and partnerships at the entity level – just like a C corporation .
By evaluating your state and local tax positions prior to a business sale , income tax obligations can usually be settled at the entity level within a state , limiting or eliminating exposure which may carry to the buyer .
• Sales / Use Tax A common misconception with sales tax is that businesses do not have to worry about it because their customers are exempt , i . e ., manufacturers / wholesalers , and therefore , a buyer will not be concerned . However , this is a top issue that often arises in due diligence . Buyers will ask about your sales tax liability , regardless of it being an asset or stock sale .
For example , if you sell a piece of equipment to a business and they use it in their sales office , it may create a tax liability and require you to collect and remit tax . To help keep you protected from a tax perspective , always obtain a signed exemption certificate from the business that claims it is exempt and make sure it meets all the documentation requirements for the state
06 | VIEWPOINTS : ISSUE 2 2024