Financial & Tax Due Diligence When Buying a Business
Financial and tax due diligence is the work that tells you whether a business is worth what you’re about to pay, and whether you’re quietly inheriting someone else’s problems. Two questions drive it: are the earnings real, and what liabilities come with the deal? A quality of earnings (QoE) analysis strips reported numbers down to the sustainable, recurring profit a buyer can actually count on. A tax review surfaces exposures, unfiled state returns, sales-tax nexus, payroll and worker-classification issues, that can land on the buyer after closing. Because the purchase price is almost always a multiple of earnings, every dollar of overstated EBITDA can cost a buyer several dollars in price. This guide covers what a thorough review actually investigates: the QoE normalization process, the six hidden tax exposures that don’t appear on a balance sheet, how asset-vs-stock structure changes the risk, the New Jersey Bulk Sale Act that can make a buyer liable for the seller’s unpaid taxes, and the 2026 OBBBA changes buyers should model. Written by Stephen Calvo, CPA, a Big Four alumnus and Partner at TC Advisors.
Depreciation Recapture on Rental Sales: The 25% Surprise
Depreciation recapture surprises more rental investors than any other tax, because it hides inside a number everyone thinks they understand. You hold a rental for years, claim depreciation to shelter the income, then sell at a gain and price it in your head at the 20% long-term capital gains rate. Then the return gets prepared: a large slice of that gain comes back at 25% (unrecaptured Section 1250 gain), and if you ran a cost segregation study, another slice comes back at ordinary rates as high as 37% (Section 1245). Recapture isn’t a penalty, it’s the IRS collecting tax on the depreciation that sheltered your income all those years, and it applies to depreciation “allowed or allowable” whether or not you actually claimed it. This guide breaks down the 25% and 37% layers, the installment-sale limits under Section 453(i), the three ways to defer or avoid recapture (1031, installment, hold-to-step-up), and the New Jersey overlay, where all gain is taxed as ordinary income up to 10.75% with no capital-gains break. Includes an interactive recapture estimator.