An accountant seeking to assist his seller client to finalize a successful transaction needs to be mindful about the impact of purchase price allocations agreed on between seller and buyer. Specifically, a buyer usually wants to attach a higher value to hard assets (vehicles, equipment, and furniture and fixtures) rather than intangibles (goodwill, customer lists, etc.) because hard assets can be depreciated or written off immediately, whereas intangible assets become amortized during a 15-year period.
In addition to the hard assets vs. intangible write-offs analysis, the seller — who, most likely, has already fully depreciated the hard assets — will have to treat any sales proceeds as ordinary income (called depreciation recapture) instead of capital gain income. The marginal tax rate on the distinction is about a 20-percent detriment to the seller. Knowing this is important before agreeing on a sales price and the underlying allocation.
Finally, purchase price allocated to the hard assets category might attract a sales tax; therefore, requiring an agreement between the seller and buyer about who has to bear this cost of the deal. It’s not automatic that the buyer pays the sales tax the way he would if he were purchasing an item at a store. It’s something to be negotiated, and many buyers seek to push this responsibility onto the seller, which is a purchase-price reduction. Because this is part of the transaction, it’s something the seller should understand — his after-tax take from the transaction will be less — before agreeing to it.
The authors — Norm Cooper; John P. Corrigan, Esq., MBA, CPA; and Daniel S. Gordon, CPA — comprise the M&A practice at PCO Bookkeepers. Visit www.pcobookkeepers.com for more information or send an email to email@example.com.