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Hello all,

I am trying to Foolishly buy a small business in California but I have a problem. The person I am buying it from hasn't paid his taxes on the business for almost three years. My two questions are as follows: Will I inherit his tax problems if I buy the business? And, can I write off the loan payments on my taxes? Any help would be greatly appreciated as I am just a new Fool in the world!

Thanks

ffortesque
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I am not sure, but I think you could become responsible for past taxes due. There are two solutions:

1. Get an indemnity agreement from the seller & hope he has assets.

2. Better yet, don't buy the business, buy the assets only.

TheBadger
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<<I am trying to Foolishly buy a small business in California but I have a problem. The person I am buying it from hasn't paid his taxes on the business for almost three years.>>

When you say "the business", that term leaves me cold. Is it a corporation? Are you buying the stock of the corporation? Are you simply buying the assets of the business that this guy is currently running? I might make a difference. A BIG difference.

<< My two questions are as follows: Will I inherit his tax problems if I buy the business?>>

Most likely, yes. The IRS verly likely has a priority lien on the assets of the business. It's possible that IRS can be paid off through the escrow process, and could release the liens. But if what you pay for the assets is not sufficient to satisfy the liens, then they might remain on the property and you could have an instant partner: Uncle Sammy.

<< And, can I write off the loan payments on my taxes?>>

Likely yes...but you've got the cart WAY before the horse. You really want to solve the business asset transfer problem before you move forward. If you are really interested in this "business", you'll want to get professional assistance with reviewing the liability implications...and that will cost you a few bucks. But it'll be money well spent. So if you are thinking about moving forward, you'll want to use the services of a tax pro with experience in IRS collection issues to help you walk through the maze.

TMF Taxes
Roy
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<< I am trying to Foolishly buy a small business in California but I have a problem. The person I am buying it from hasn't paid his taxes on the business for almost three years. My two questions are as follows: Will I inherit his tax problems if I buy the business? And, can I write off the loan payments on my taxes? Any help would be greatly appreciated as I am just a new Fool in the world! >>

I spent 25 years in IRS Collection and have a passing familiarity with your situation. As has already been pointed out, you need professional assistance if you're contemplating buying this business. My comments will seem terribly negative. Sorry, but a tax collector doesnt' deal with thriving businesses, so I tend to have a negative view. This may very well be the opportunity of a lifetime, but you need to know a LOT more than you do now. Some starting points:

1. What are you buying? If it's the stock of a corporation, the corporation's debts come with the stock. If you're buying the assets, California probably has some sort of bulk transfer procedure which must be followed. This gives creditors notice of the sale so they can try to recover from the proceeds, and if it isn't followed it can cloud your title. You need a lawyer well versed in property law.

2. Speaking of other creditors, do you really think he just owes taxes? Get the books and have an accountant go over them. Contact suppliers and customers to verify what you see.

3. As for specific tax debt, a lot depends on the status of the account. Has he filed and not paid or simply not filed? What kind of taxes are we talking about? If there is a tax lien on the property (which may not be revealed by a public records search) the lien will follow the property into your hands if you don't get a discharge. Get a disclosure authorization from the owner and get the information first-hand from the IRS. And don't forget the state. Unless it's changed, there are three state agencies that deal with taxes; one for income tax, one for unemployment tax, and one for sales tax. California has similar administrative authorities to the IRS, so you have to make sure that they're happy.

4. There's a lot more, which is why you're going to hire some professionals to help you, but you have to provide the most important ingredient (other than cash). Introspection. You are looking at a failed business, presumably founded by someone who thought he had a better mousetrap. How is yours better than his? Why did he go under? How are you going to avoid his problems? And do you have enough cash to get you by while you lose money the first 6 to 18 months you're in business? (I'd say at least 75% of the businesses I dealt with were undercapitalized from day 1.)

Before signing off I went back and reread. I have inferred that this is a failing business. You didn't really say that. It may be that you're dealing with a successful business whose owner cheats on his taxes. If so, I'd suggest to you that it's not the only place he cheats.

Best of luck, and don't quit your day job until you're sure.

Phil Marti
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