Underwriting Depreciation from Asset Step-Up

November 23, 2021

by a searcher from University of Pennsylvania - The Wharton School in Portland, OR, USA

Assuming that you are executing an asset-sale, which allows for a full step-up in value, what are the implications of this on how the depreciation is underwritten? For example, if you buy a blue-collar trade business (plumbing) for $1mm, and the company's main assets are vehicles, can you depreciate the entire $1mm dollars over a period, or do the standard limits for vehicle depreciation schedules still apply?

Please feel free to comment with recommended tax advisors!

Thanks!

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Reply by an investor
from Erasmus University Rotterdam in Philadelphia, PA, USA

In principle you allocate the purchase price to the fair market value of assets that you acquire (in this case vehicles but it can also relate to patents, machines, real estate etc). The difference between purchase price and the amount allocated to such assets is considered goodwill. The goodwill is amortized in line with the tax amortization rules for goodwill and the other assets are amortized in line with the tax amortization rules for such other assets (in your case vehicles). The difference in amortization period makes it tempting to allocate the purchase price as much as possible to assets that can be amortized faster than goodwill. But you have to take a reasonable position to avoid lengthy and costly disputes with the IRS. If the amounts are larger, then it is advisable to allocate the purchase price to various assets in the purchase agreement. That gives you a stronger position and implies that the seller is bound to follow that as well (and reduces risk of seller and buyer taking different views that benefit each of them the most - which the IRS does not like).

Reply by a searcher
from The University of North Carolina at Chapel Hill in Cornelius, NC, USA

Would definitely seek professional advice for this one but it was one of my favorite classes during my MBA!

As I understand the 2017 tax cut and jobs act, you can depreciate in 1 year 100% of trucks, SUVs, and vans that are used >50% on the business. Granted, for a $1m company, that is likely not financially sound to depreciate the full amount but you basically have no limit (At least until 2023 when the provision in the bill expires). Would welcome to hear anyone's experiences otherwise of course!

Also interested to hear what others think here and if there are other recommended advisors. Came across this one recently with a good explanation: https://gscpa.com/how-much-can-businesses-deduct-for-vehicles-placed-in-service-in-2019/

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