Asset purchase basis allocation & taxes

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January 21, 2025

by a searcher from Georgetown University in Boulder, CO, USA

Hey searchers-
I'm closing my first acquisition this week. In discussion with seller's lawyer, she told me that I'll be paying sales taxes on the personal property transferred from the business, and even though my APA didn't mention it, she wanted the language to state that I'm paying that sales tax.

My original offer was all-in $750k. i know we need to agree on how that is being allocated across assets in the business. But what are the general guidelines for deciding what gets allocated across the purchase price? And do i really need to pay that sales tax?

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commentor profile
Reply by an investor
from University of Baltimore in Denver, CO, USA
^redacted‌ - purchase price allocations are typically done in conjunction with the tax accountant/CPA who will be working on your business. They can review the specifics.

In layman's terms... you have split incentives. The more you have in personal property (equipment, vehicles, machinery, etc.), the more accelerated depreciation you can take (5-years and weighted to year-1) but the more you pay in transfer taxes. At the same time, the less you have, the more that will be allocated to Goodwill and amortized over 15-years.

I'm a money now guy, so tend to lean towards what will help impact the early years to protect cash flows. Typically sellers want more to be allocated to Goodwill.

And glad to see a fellow Coloradan. I host a large ETA meetup (900+ members) in Denver on the first Wednesday of each month. Feel free to shout if you're ever interested in attending or connecting.
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Reply by a professional
from University of Miami in New York, NY, USA
Chris - I’m a tax lawyer with 20+ years experience in M&A. Like many folks here have said, purchased by allocations are usually done within the asset purchase agreement, and are typically addressed in the LOI. You’re going to have to find a balance because the seller incentive to have everything allocated to the tangible property could benefit you in the short term, Having allocations favored towards intangibles could help you with depreciation recapure issues later.

I’d be happy to walk you through it. Feel free to call me or schedule something on my calendar.

https://calendly.com/petigara-law-group/meeting-with-vishal-petigara
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