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State Unemployment Tax Account - The "Invisible" Asset
by Dennis J. Horan, CPA
One of the "invisible" assets that is transferred when a business is bought or sold is the state unemployment tax account. When a company purchases, leases or takes control of substantially all of the assets of an ongoing operation which results in the continuance of that operation's trade or business, the acquiring company "assumes the tax position of the previous owner/operator." The acquiring business uses the same unemployment rate as the seller and assumes any outstanding liabilities due to the agency of that state. Also included is the wages paid by the predecessor in computing the tax base ($ 7,000 in Indiana) per employee. As an example, if the disposing company had already paid the 2007 tax on employee B, then the acquiring company would owe no tax on B for 2007.
The same situation applies when a business changes or reorganizes its capital structure. For instance, if a sole proprietor incorporates his business, the new entity is considered a continuation of the preceding business. The new entity must apply for a new account number, but retains the sole proprietor's rate and the individual's wages paid toward the tax base for the year by the sole proprietor is carried over.
If a segregable portion of the business is acquired (such as one store out of a chain of nine stores) , the disposing entity transfers a proportionate share of their experience balance (the amount of taxes paid in less benefits paid out) and rate to the acquiring entity. As stated before, the wages of any employee of the disposer that has been retained by the acquirer would be used in computing the tax base per employee for the year.
As you can see, one small element of any business purchase is the status and rate of the seller's unemployment account. The future cash flow problems caused by a high or low rate should be factored into any financial decision.
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