Is the "cost of sale" when buying a business tax d...
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link8822
Level 2

Is the "cost of sale" when buying a business tax deductible?

Hello,
I am thinking about buying an ecommerce business/website from flippa.com .  I know that after I own the business, I can write off business expenses for tax deductions.  But my question is whether the amount I pay to actually buy the business is tax deductible?

 

For example, if I buy an already existing company X for $10,000 does that mean company X has a business expense of $10,000 that I can write off on my taxes?  

All the best,
-Steve

4 Replies
Opus 17
Level 15

Is the "cost of sale" when buying a business tax deductible?

No.  To be brutally honest, the fact that you are even asking this question suggests that you need to take some business courses or hire an accountant before you invest in any kind of business.  You could really mess up your taxes and owe massive penalties.

 

When you buy a business, you are investing your personal money in the business.  It's an investment, like buying gold or stocks or a house.  If you later sell the business for more than you invested, that will be a taxable capital gain in the year you sell the business.  That taxable gain would be in addition to any taxable income the business generates from regular month to month or year to year operations.  If the business goes bankrupt or you sell it for less than your investment, you may have a deductible loss when that happens, but that gets complicated and you would need further tax advice at that time. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Rick19744
Level 11

Is the "cost of sale" when buying a business tax deductible?

I agree that speaking to a tax professional one on one would be very beneficial prior to acquiring any business.

However, some high level discussion:

  • You need to consider the type of entity in which you will operate
  • You need to consider how you will be acquiring the business; stock purchase or asset purchase
  • If an asset purchase, there is a specific IRS form that needs to be completed that will detail at a high level the type of assets sold / acquired. 
  • If an asset purchase, the asset class will determine the depreciable / amortizable life of the purchase price
  • There are fewer stock purchases these days, however, there is an option to acquire the stock and treat it as an asset acquisition.

The bottom line is generally with an asset purchase you are able to either depreciate or amortize the purchase price over a period of time.  

*A reminder that posts in a forum such as this do not constitute tax advice.*
link8822
Level 2

Is the "cost of sale" when buying a business tax deductible?

Thank you, rick!  Yes, I think the amortization process is more of what I'm asking about.  But I found out that it also depends a lot on the state and municipality regulations of what's allowable so will be reaching out to a CPA .

Rick19744
Level 11

Is the "cost of sale" when buying a business tax deductible?

State and municipality rules / regulations don't impact federal tax law.

Speaking with a tax professional will pay dividends in the long run.

*A reminder that posts in a forum such as this do not constitute tax advice.*
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