Purchase Price Allocation Considerations
There are important issues to take into consideration when allocating the purchase price in a business sale. The three parties impacted with the purchase price allocation are the buyer, the seller and the IRS. Of course, the goal is to minimize the IRS tax impact in the transaction, but most often the impact goes in the opposite direction for the seller when trying to benefit the buyer, and vice versa.
It is to the seller’s advantage to get capital gain tax treatment on most items. And it’s to the buyer’s advantage to expense or write off as much as possible each year. In the asset purchase agreement, the buyer and seller must agree on the allocation of the purchase price, and it must be reported accordingly on IRS Form 8594. A stock sale will normally favor the seller greatly and disallow most write-offs for the buyer, with the exception for some allocation to personal goodwill and the owner’s non-compete.
Below is a general guideline as to how the allocation would impact the seller versus the buyer on an asset sale. We are assuming all assets have been held for at least a year by the seller; otherwise most of the selling assets would be taxed at ordinary income tax rates if held less than a year. For this discussion, we assumed that the selling business is not a C Corporation and the sale is being treated as an asset sale. Please confirm this information with your CPA prior to relying on any of the information below.
Impact to Seller
Impact to Buyer
|Accounts Receivable||No gain or loss unless allocation is different than stated book value||No write-off|
|Inventory||No gain or loss unless allocation is different than stated book value||No write-off|
|Furniture, Fixtures, Vehicles, Equipment, Computers||Amounts of previous depreciation are recaptured at ordinary rates above the tax basis; amounts above the cost receive capital gain tax treatment.||Varies depending on type of depreciation taken, but usually 3 to 7 years, unless taking the Section 179 deduction with a current deduction limit of up to $1M|
|Goodwill||Capital gain tax treatment||Written off over 15 years|
|Non-Compete||Ordinary income tax rates||Written off over 15 years|
|Building||Amounts of previous depreciation are recaptured at ordinary rates above the tax basis; amounts above the cost would receive capital gain tax treatment.||Written off over 39 years for commercial property|
|Land||Capital gain tax treatment over the cost||No write-off|
|Consulting Agreement||Ordinary income tax rates, plus employment taxes||Current deduction|
|Intellectual Property, such as Patents and Trademarks||Amounts of previous amortization are recaptured at ordinary rates, then capital gain tax treatment over cost||Written off over the legal life|
|Employment Agreements||Ordinary income tax rates, plus employment taxes||Current deduction|
|Customer List||Capital gain tax treatment||Written off over 15 years|