Today TaxMama hears from Cinda in the TaxQuips Forum with a quickie question. “I bought a company and with it came $72,310 worth of outstanding debt. How should I initially set this up and how would I track the payments I make towards these payables? The payments are an expense correct?”
It’s so distressing to get these questions after the fact.
This is the kind of thing you ascertain before buying the company – learning the tax aspects of your purchase. Being able to understand those issues while you negotiate may also put you in a position to get a better price.
In a vacuum, no one can really give you a definitive answer. Here are the issues you face.
Typically, as a cash basis taxpayer, you may deduct expenses as you pay them. No doubt, you’re counting on that. In a purchase of a business, that’s not necessarily the case. You are buying the business, as a whole. Which means, whatever the business already owns, you own. So you have bought whatever it is those accounts payables cover.
Without seeing the business, the contract, the books of the prior owner (you did get those before you bought the business, right?) no one can really give you a definitive yea or nay.
I suspect that at the time of the purchase, you will have accounts payable on the books. As you pay them down, you will debit cash and credit accounts payable. In other words, I don’t think you will get a deduction for those expenses. The business already owned those assets, or consumed those services by the time you bought them.
Also, please read the note about another thing to consider before buying a business.
And remember, you can find answers to all kinds of questions about buying a business, accounts payable, and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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