Rule of thumb for asset split

searcher profile

October 29, 2019

by a searcher from Babson College in Spokane, WA, USA

Does anyone have any general rules of thumb for splitting assets in the purchase agreement between inventory/PPE/goodwill/etc?

I have talked with my accountant, but interested if anyone had any advice or if there are any hard and fast rules for avoiding the IRS looking at something more closely? Especially if the PPE is mostly fully depreciated/carries a low book value.


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commentor profile
Reply by a professional
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA
I always try to avoid agreeing to a purchase price allocation in the transaction documents when I represent Buyers. This way, Buyers can value the assets based on supporting evidence or appraisals. There is nothing in the tax law that say a Buyer and Seller have to agree, but the tax law does say if you do agree in writing then both parties must file consistently. Upon IRS audit, they can change the allocation if they disagree with the allocation, but it would likely have to be abusive for them to want to make the change. When I represent Sellers, I always push to agree to a purchase price allocation in the transaction documents in order to minimize ordinary income and maximize capital gain income. The difference in tax rates can be as high as 17%, which can be meaningful.
commentor profile
Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
Hi Michael -
The IRS has set this up so generally the buyer and seller want the opposite treatment. So in the absence of other buyer/seller rationale, we place inventory at the lower of cost or current market, FF&E/PPE at the the current used market value for the equipment in its current state, and the remainder is goodwill. With accelerated deprecation and Section 179 tax rules, it is more common than not to find that FF&E/PPE has a very low tax book value -- the seller would like to leave the assigned value here to avoid depreciation recapture tax, but that leaves the buyer with a very low basis to begin their depreciation -- hence the current market value is fair to both.
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