When buying or selling a business, the final sale price isn’t just a single number. It’s split across the business’s various assets, each with different tax consequences. Getting this split—known as “purchase price allocation”—right can have a big impact on how much you pay (or save) in taxes. Here’s what you need to know to make sure you’re not leaving money on the table.
Understand What’s Being Bought and Sold
Why It Matters: Different assets, like equipment or customer lists, have different tax rules. Allocating the price correctly can optimize the tax benefits.
The Advantage: Allocations affect tax deductions for buyers and capital gains for sellers, which can mean significant tax savings over time.
Know the Allocation Rules (Without Getting Overwhelmed)
Rule of Thumb: For many business acquisitions, IRS rules (like Section 1060) apply, breaking down the price into specific categories, each treated differently for taxes.
The Takeaway: A knowledgeable approach here helps avoid tax issues later and makes audits smoother.
Prioritize High-Value Assets First
How It Works: Cash and equivalent items come first, followed by tangible assets like equipment or inventory, then intangible assets, and finally, goodwill.
The Benefit: Buyers benefit from prioritizing assets that can be quickly depreciated, leading to faster tax deductions, while sellers benefit from lower taxable gains on certain assets.
Get it in Writing
The Why: Once you and the other party agree on the allocation, document it in the sales contract.
The Impact: A written allocation agreement is typically respected by tax authorities, helping reduce the chance of disputes.
Seek Guidance for Best Results
Why Consult an Expert: While some of these steps are straightforward, tax experts can provide advice tailored to your specific deal.
What You Gain: This ensures your allocations maximize potential tax savings without unexpected issues down the line.
A thoughtful approach to purchase price allocation can save you money in the long run. By keeping these core tips in mind, you can make tax-savvy decisions that benefit both sides of the transaction. In any business deal, understanding the tax impacts isn’t just a technicality—it’s an opportunity to make the most of your investment.
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