The latest decision of the tax court of Peco Foods, Inc. T.C. Memo. 2012-18, confirmed by the Eleventh Circuit, shows that the way in which the award of the purchase price is documented in the agreement must be the subject of considerable attention. In this case, the buyer and seller have a detailed description of the assets acquired and the allocation of the purchase prices. Several provisions of the agreement and related timetables referred to “buildings.” The buyer filed tax returns with the agreed allocation. Subsequently, the buyer had a cost segregation study conducted. The study showed that a significant portion of the purchase price originally allocated for buildings (39 years of life) in the agreement could be allocated for shorter material goods. The buyer submitted a change to the accounting method to the IRS to take advantage of the shorter lifespan. The Internal Revenue Service has questioned this change. The IRS`s position was that the very specific allocation of the agreement was binding on both parties and that references to “buildings” indicated a specific intention that this allocation under the agreement was intended for more sustainable assets. The distribution of the purchase price between asset classes must be managed consistently between the buyer and the seller, who each attach Form 8594 to their respective tax returns for the year of purchase/sale, so that the IRS can review this tax treatment.
Here is a table that describes the different “classes” of assets as prescribed by the IRS and as shown on Form 8594: before you assign a purchase price, you must ask yourself whether the sale will be exclusively a share sale or if it is a non-sale of shares, which means that you only offer the assets of your business. An asset sale is another name for non-sale of shares. The term “asset sale” can refer to two distinct types of sales. The first type of asset sale includes the tangible and intangible assets of an ongoing business. The second type of asset sale focuses on the sale of a company`s assets. This type of sale may include all assets of an entity or a single group of assets. This type of asset sale, often referred to as liquidation, usually takes place after a business closes. The other reason for being overweight with asset sales is that the buyer can deduct the costs of the assets he or she acquires over a shorter period of time than the depreciation charge. However, in the case of a share sale, the buyer “sits” on these costs only for years and only enjoys a tax advantage if he sells the transaction many years later.
When selling a business, it is important to assign a purchase price for the company`s assets. A purchase price is awarded for both share sales and non-share sales.