Inventory Depreciation in Asset Sale

searcher profile

July 31, 2024

by a searcher from University of Virginia-Darden - Darden School of Business in Denver, CO, USA

Apologies if this is an ignorant question. I am under LOI for a warehousing business. The purchase price is $7m. Of that, $4m is inventory. The seller just asked about moving the transaction from an asset sale to a stock sale and I am trying to understand my tax implications for doing so. For simplicity, lets say the asset sale would be broken up as $4m in inventory and $3m in goodwill. I know goodwill is depreciable over 15 years. The inventory represents about 3-4 months. From a practical standpoint, would I get any tax benefits from depreciating the inventory? Or since I will likely sell it all before year end is the depreciation expense going to be near $0.

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commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
I do high-level tax analysis to determine structure and tax impact on all my deals. To be frank, most CPAs don't know this or when they do, sellers don't understand their analysis. I just did one where I presented to seller what if buyer allocates x or y or z to fixed assets.
My go to person is ^redacted‌‌. He has made some good points above.
In your case is Seller an S Corp? Are there fixed assets? Is WC included in price? Is seller on cash basis (my guess based on brief description)?
If seller is S, fixed assets are low, seller is not under-reporting inventory, and accounting is on accrual, then the tax delta between Asset/Stock should be low. In this situation, either the advisors are scaring the seller for small tax delta, or your price is too low, or seller wants to cover up a liability.
I presume you have checked that there are no major change of control clauses in contracts.
Happy to talk.
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Reply by a professional
from University of Miami in New York, NY, USA
Morgan - I agree with everyone else that an asset sale would probably be a better solution for you. However, it’s like a the seller needs a stock sale because all of his assets are full appreciated, while he has “outside basis” on the stock.

The solution here would be the implementation of a 338(h)(10) election with a transaction being a stock sale, but you get to treat it as an asset sale for tax purposes. That way, you get to depreciable assets inside the organization (because of asset purchase treatment), well the seller has the benefit of the stock sale. he may also be trying to shave off some state tax liability by treating as a stock sale.

Happy to explain in more detail - redacted or###-###-#### .

Also, you should get an accountant involved to determine the depreciation that would be available to you as an asset sale (via 338(h(10) treatment).
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