Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Buying A Business

Posted by taxguru on October 28, 2007

Q:

Subject: Buying a business

 

Hello,

I hope you can help me.  I am in the process of buying a small retail business for sale in Massachusetts.  The broker gave me the owners schedule c from 2006.  The owner has 2 locations under the same name. They are a sole prop.  The form shows a loss of $154,000.  They claim it is due to a one time write off of old inventory.  They said you are allowed to do this if you are selling or closing a business.  Is this true?  If so, where is it shown on the schedule c tax return? 

 

Thanks for any help!

A:

You are venturing into extremely dangerous territory if you are trying to evaluate any business purchase without the assistance of your own personal professional tax and accounting advisor.  There are so many ways in which you can be screwed over, it would take me hours to list them.  In fact, I have always advised people to insert into any agreement regarding the potential sale or purchase of a business that it is contingent on the approval of the person’s legal, tax and accounting advisors.  This escape clause gives you an easy way to back out of any deal that doesn’t feel right to you or appear to be completely kosher to any of your advisors.

In the case you mentioned, they seller is not being exactly truthful.  It is standard practice to adjust inventory values down on the books and tax returns to the lower of their actual cost or their current market value at the end of any tax year; not just when the business is going to be sold.  Any such adjustment will be reflected in the Cost of Goods Sold section of the Schedule C.  These adjustments should have been made at the end of each tax year and not in one big giant write-down as it appears to be from your description.

In regard to what you should be looking at in order to properly evaluate a business’s history, the Schedule C is just the start.  As your personal professional advisor will explain, you need to also see other more reliable records as well, such as Sales Tax and Payroll reports, as well as bank statements and QuickBooks or other accounting detailed records.  It should be approached in a similar manner as an IRS auditor would use to examine the business’s finances.  Any business seller who refuses to allow you to see those records and will only provide you with a possibly phony Schedule C is not to be trusted and you should never do any kind of business with.

Again, a good professional tax and accounting advisor should be hired to review the records of any potential business purchase. Even if s/he advises against making the purchase, that is money very well spent.  It is much cheaper to pay an accountant $500 or $1,000 now to warn you away from a dangerous purchase, than to lose the $100,000 or more that a hasty uninformed purchase would inevitably result in.

Good luck.  I hope this helps.

Kerry Kerstetter

 

 

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