Selling a company in Texas: the tax, sales-tax and paperwork details owners miss

What is different about selling in Texas

Texas has no state personal income tax, so an owner who lives here generally does not pay state income tax on the gain from a sale, but federal tax still applies and the structure of the deal decides how much of it you pay. Buyers of Texas businesses also have a reason to insist on a Certificate of No Tax Due from the Texas Comptroller, because without one they can be held liable for the seller's unpaid state taxes. And if you close or merge your company after the sale, the state expects a final franchise tax report. None of these are reasons to delay a sale, but each one belongs on your checklist early.

We at MDR & Associates have been selling Texas companies since 2008, and we work alongside the owner's CPA and M&A attorneys on every deal. I am not a tax advisor or a lawyer, and this guide is general information, not tax or legal advice. Its purpose is to help you ask the right questions of the licensed professionals who will advise you on your specific sale.

No state income tax does not mean no tax

The absence of a Texas personal income tax is a real advantage for owners who live here. But the federal tax on a sale can be substantial, and it depends heavily on what exactly is being sold and how the price is divided.

Owners sometimes assume the whole gain will be taxed one way. In practice, the character of the gain can vary by asset. IRS Publication 544 explains that gain or loss on business property may be capital or ordinary, depending on the asset. That is why the allocation of the purchase price, covered below, deserves as much attention as the price itself. Talk to your CPA before you sign a letter of intent, because many of the terms that drive your tax bill are set at that stage.

Asset sale or stock sale

A sale can be structured as a sale of the company's assets or as a sale of the ownership interest itself, such as stock in a corporation. The choice affects taxes for both sides, which liabilities the buyer takes on and how contracts, licenses and permits transfer.

Buyers and sellers often have different preferences, and the final structure is a negotiated point. It is one of the reasons we compare offers on structure as well as price, and one of the places where your attorney and CPA earn their fees. Ask them to model what you would keep under each structure before you agree to one.

Practical details follow from the choice as well. In an asset sale, contracts, leases and permits may need to be assigned or reissued to the buyer, and some require consent from the other party. In a stock sale, the entity stays the same, so the buyer will look harder at its history. Either way, start listing those contracts early so nothing surprises you in due diligence.

How the price gets divided, and why the IRS cares

In an asset sale, the IRS does not treat the business as one thing. Publication 544 says the sale of a business is usually not a sale of one asset; each asset is treated as sold separately for figuring gain or loss. The price is allocated across classes of assets, such as cash, receivables, inventory, equipment and intangibles like goodwill, using what the IRS calls the residual method.

Buyer and seller may agree in writing on that allocation, and according to the IRS the agreement binds both parties unless the IRS determines the amounts are not appropriate. Publication 544 adds that the buyer and seller must each report the allocation among the business assets, generally by attaching Form 8594, the Asset Acquisition Statement, to their returns for the year of sale. Because each class can be taxed differently, the allocation is often negotiated alongside the price.

• Agree on the allocation in the purchase agreement, not after closing
• Make sure your allocation and the buyer's match on Form 8594
• Have your CPA review the allocation before you sign
• Keep the records that support the values used

The Comptroller certificate buyers will ask for

Texas has a rule that protects the state's tax collections when a business changes hands, and it shapes how buyers approach a closing. The Texas Comptroller's guide to buying an existing business explains that if the seller owes state taxes and the sale closes without a Certificate of No Tax Due, the purchaser can be held liable for the unpaid taxes up to the purchase price. Buyers are required to withhold enough of the purchase price to cover taxes owed until the seller provides proof that they are paid or a certificate.

The certificate must be requested before the sale closes, and the Comptroller says the seller and purchaser jointly submit Form 86-114. According to the Comptroller, a certificate is usually issued within 10 business days of a proper request, but it can take up to 90 days if an audit of the seller's books is needed. That timing matters, so plan for it early in due diligence rather than in the last week.

Note who is protected. The Comptroller states that only the purchaser is protected by the certificate; the seller remains responsible for any taxes, penalties and interest from before the sale. If your sales tax filings have gaps, clean them up before you go to market.

• Confirm your sales tax and other state tax filings are current before marketing begins
• Agree with the buyer on who prepares the joint Form 86-114 request, and when
• Allow time in the schedule in case the Comptroller needs to audit your records
• Expect a buyer to hold back part of the price if the certificate is not in hand at closing

Seller financing and the timing of tax

Many sales include some seller financing, where the buyer pays part of the price over time. The IRS defines an installment sale as a sale of property where at least one payment is received after the tax year of the sale, and gain is generally reported under the installment method, meaning you report the gain portion of each payment in the year you receive it. The IRS also allows a seller to elect out and report the whole gain in the year of sale.

That can spread tax over several years, but it also means you are a lender to the buyer, carrying the risk that the business struggles under new ownership. Weigh the tax timing against that risk with your CPA. Financing is also why we help qualified buyers with conventional and SBA financing, since a buyer who can borrow more from a lender needs less from the seller.

Closing out the company after an asset sale

After an asset sale, many owners are left with an entity that has sold its operations. If you plan to wind it down, Texas has its own steps. The Comptroller's franchise tax guidance says a Texas entity that is terminating, converting or merging must file a final franchise tax report and pay any amount due in the year it plans to terminate, convert or merge, and that a Certificate of Account Status is needed before ending its registration with the Texas Secretary of State.

Owners who are married should also remember that Texas is a community-property state. How that affects your ownership interest and who needs to sign closing documents is a question for your attorney, and it is better asked at the start than at the closing table.

• File final returns and the final franchise tax report
• Obtain a Certificate of Account Status before ending the entity's registration
• Close or transfer payroll, sales tax and vendor accounts
• Keep tax and employment records after closing for as long as your CPA advises

What the Dallas–Fort Worth market adds

Beyond taxes and paperwork, location shapes who buys. Our firm has offices in Frisco, Dallas and Fort Worth as well as Austin, Houston and San Antonio, and our buyer database includes thousands of individual, corporate and private investment buyers, many of them specifically looking for businesses in the region. For an owner, that means the buyer pool for a well-run company here can extend well beyond local competitors, including private equity and capital groups from across the country.

It also means the details above are familiar to the buyers you will meet. Experienced acquirers will ask about sales tax compliance, allocation and structure early. Having clean records and a CPA who knows your numbers lets you answer quickly; if your books are behind, catching up on books that are a year behind is the place to start.

Putting the Texas checklist into the sale timeline

Most of these items fit naturally into the stages of a sale. Tax structure and allocation belong before the letter of intent. The Comptroller certificate belongs early in due diligence. The final franchise tax report and record retention belong after closing. If you want to see where each stage falls, I lay them out in how long it takes to sell a company, and for life after the wire transfer, see how long owners stay on after a sale.

Our discovery meeting is complimentary and takes about an hour, at our Frisco office or by phone. We review three years of financials, give you a free low-to-high opinion of value and flag the issues your CPA and attorney should look at first. Our fee is 100 percent performance-based, so nothing is owed unless a transaction closes.

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