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I am buying out my co-founder of our 3 year old company that we started as a hobby/second job. We are profitable (although you definitely couldn't live off the profits alone!).

Anyway, we've agreed on a price and will draft an IP document as discussed in related questions. We each have a 50-50 share of the company and I will buy him out & own 100% share.

Each year we fill out the Federal 1065 and Schedule K-1. What are the tax implications each of us will face on our 2010 return?

Perhaps I should open a second question for this, but oh well--here goes: Is there a tax benefit (for either one of us) to setting the purchase date to lie on the beginning/middle/end of a particular fiscal quarter?

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Pete, You should involve your CPA for this decision. As for the date of the transaction, the important thing to consider would be how you can offset the expense against other income.

I think your partner will be taxed at a capital gains rate for selling his share of the company. That may be a good thing.

I honestly think your best bet is to have a CPA look at your arrangement. They may be able to make it mutually beneficial for you by doing some tax planning. A good CPA will not charge an arm and a leg for this type of advice (maybe a finger)

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