Buying or merging with another business can be a smart move for growth. But it comes with tax responsibilities. In Texas, even though there’s no personal or corporate income tax, there are still reporting and tax consequences that can affect how the transaction plays out.
If you’re considering a deal, knowing the key tax considerations for business mergers and acquisitions can help you avoid costly mistakes. Here’s what to keep in mind before you move forward.
Asset Purchase vs. Stock Purchase: Different Outcomes, Different Taxes
One of the biggest decisions in a business acquisition is whether to buy the company’s assets or its stock. The tax results can be very different depending on how the deal is structured.
In an asset purchase, the buyer picks specific items to buy—like equipment, inventory, contracts, or trademarks. They don’t take on the whole business, just parts of it. This type of deal often works in the buyer’s favor, since they can set new values for the assets and claim tax deductions like depreciation. For the seller, though, this setup can lead to a higher tax bill depending on how their profits are taxed.
In a stock purchase, the buyer takes over the entire company by buying its shares. The legal business stays the same, which means the contracts and licenses usually stay in place. This kind of deal is often simpler for the seller and usually taxed at lower capital gains rates. But for the buyer, it comes with more risk—they also take on the business’s debts or unpaid taxes.
Even though Texas doesn’t have a state income tax, the way the deal is structured can still affect Franchise Tax filings. For example, an asset purchase might mean opening a new tax account, while a stock deal may continue under the same one. That’s why choosing the right structure matters for both tax and compliance purposes in Texas.
Texas Franchise Tax: Don’t Ignore It
The Franchise Tax in Texas applies to most businesses operating in the state. It’s not based on net income, but rather on a business’s margin, which can be calculated using different methods—such as total revenue minus cost of goods sold or compensation. As of 2024, businesses with annualized total revenue over $2.47 million are required to pay this tax.
When two businesses merge or one acquires another, the combined revenue may exceed this threshold—even if each business previously qualified for exemption. In that case, the newly formed entity could become liable for the Franchise Tax. After the transaction, the acquiring business may also need to update its information with the Texas Comptroller and ensure all required reports are filed properly.
Sales Tax and Tangible Assets
If your acquisition includes tangible personal property—such as furniture, equipment, or machinery—Texas sales tax may apply. These items are commonly part of asset purchases, and unless a valid exemption applies, the buyer could be responsible for paying sales tax on them.
The details matter. If you’re acquiring inventory as part of the deal and plan to resell it, that portion may be exempt from sales tax—but only if you provide a valid Texas resale certificate and meet the state’s exemption requirements. Keeping proper records is key to ensuring the exemption is valid if ever reviewed by the Texas Comptroller’s office.
Federal Tax Planning and Reporting
Beyond state obligations, the structure of your merger or acquisition significantly influences your federal tax responsibilities. Elections such as Section 338 allow a stock purchase to be treated as an asset acquisition for tax purposes, providing buyers with potential benefits like a stepped-up basis in assets. However, this can also lead to double taxation, affecting the seller’s tax outcome. Additionally, the handling of goodwill—amortizable over 15 years in asset purchases but not in stock purchases—along with the assumption of liabilities and payment structuring, can alter the overall tax implications. Engaging in thorough M&A tax planning before finalizing the deal is essential, as post-signing adjustments may be limited.
Keeping Records in Order During the Transition
When two businesses come together, keeping track of paperwork can get complicated. But both the IRS and the Texas Comptroller expect clean, organized records before and after the merger.
You’ll need to hold onto documents like contracts, purchase agreements, tax returns, and financial records. In Texas, sales and tax records should be kept for at least four years. The IRS recommends keeping most business tax records for three to seven years, depending on the situation.
If your new business setup includes changes to your company name, structure, or ownership, make sure to update your information with the IRS, the Texas Comptroller, and possibly the Texas Secretary of State. You may also need a new EIN if you’re forming a new legal entity.
Staying on top of your records and updates helps keep your business in good standing and avoids trouble later on.
Avoiding Surprises During and After the Deal
Tax problems often show up when proper due diligence is skipped. It’s common to discover unpaid taxes, unreported income, or unfiled returns after the deal has closed—and by then, the new owner may be responsible.
That’s why it’s important to take time before the deal is final to ask the right questions and confirm that all filings are current. A few extra steps up front can save you from dealing with IRS letters, penalties, or state tax audits later.
Work With Deligans Tax Partners, LLC
When you’re dealing with a merger or acquisition, tax planning should never be an afterthought. At Deligans Tax Partners, LLC, we help Texas business owners stay informed about the tax considerations for business mergers so they can move forward with clarity. Our team works with you to prepare accurate filings, stay compliant with Franchise Tax rules, and make sure every step is handled with care.
We offer individual tax preparation, business tax preparation, business and tax consulting, and bookkeeping services—so you’re not left sorting it all out alone.
Visit https://deligans.tax to find out how we can help your next business move go smoothly.