In our last installment, we discussed IRS Code Section 1202, pertaining to the tax benefits on sales of qualified small business stocks. Today, we discuss one of the most important facets of the sale of your business – the allocation of the purchase price, once that price has been agreed upon.
When a business is sold, both buyer and seller must file Form 8594, Asset Acquisition Statement, with their individual income tax returns for that year. This form requires a separate listing for each class of asset sold (e.g., stock, in a sale of stock; goodwill; other intangible property; and, in an asset sale, equipment, inventory, land, buildings, etc.). The amounts reported for each class of asset on the buyer’s and seller’s Forms 8594 must agree with the allocation as listed in the Purchase Agreement or other written document, signed by both parties, and with each other’s Form 8594.
The allocation of the purchase price can have a significant impact on the tax liabilities incurred by buyers and sellers pursuant to the sale/acquisition of the business. Mistakes, therefore, can be costly.
Allocation of the purchase price in a stock sale is relatively simple by comparison to an asset sale. The principal items to allocate will be:
Even agreeing on the value of a business’ goodwill can become a thorny issue, however. Let your Transaction Advisory Team hash out the details with the buyer’s team. They are your experts; trust them to exercise their skill and zeal on your behalf.
Allocating the purchase price in an asset sale is more complicated. There are seven classes of assets which must be reported, and arranging the allocation so as to be acceptable to both seller and buyer is a painstaking and time-consuming process.
The seven asset classes are:
Again, I cannot recommend too highly that your team and your buyer’s team do most of the negotiations between them. Of course, you and your buyer must approve any allocation before the deal can be finalized.
If you are considering a potential sale of your business, I recommend strongly that you consult with us before making any final decisions.
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Until next time –