Today's Business Owner

Coming to terms on a price is usually the pinnacle of negotiation in any asset purchase. It is important for both the buyer and seller to be aware the price must be allocated between classes.

Reporting the Price of the Assets
The purchase price of assets must be reported on the Internal Revenue Service Form number 8594. The form is required "if goodwill or going concern value attaches, or could attach to such assets, and if the buyer's basis in the assets is determined only by the amount paid for the assets."
This form is prepared and attached to the appropriate income tax return (1040, 1041, 1065, 1120 or 1120S) in the year of the sale.

The true purpose of the form is to allow the Internal Revenue Service the ability to determine if both the buyer and seller treated the sale consistently. This form forces both parties to agree on the allocation of price between various classes.

Defining the Business Asset Classes
These are easily defined in the instructions. The area for negotiation is typically between Class III, IV and V assets. Class IV and V assets are basically the same. These assets include Section 197 Intangibles such as goodwill, going concern value, patents, copyrights, licenses, trademarks, franchises and covenants not to compete.

Class III assets are defined as tangible assets that are not Class I, II, IV or V assets. These assets typically include furniture, fixtures, land, buildings, equipment and inventory. These assets should be allocated according to their fair market value as of the purchase date. The remaining purchase price amount, if any, in excess of the fair market value of Class III assets will typically be allocated to Class IV or V.

The area for negotiation is important to understand because the tax treatment of these assets will vary from buyer to seller, including tax rates for the buyer and the ability for the seller to depreciate or amortize the assets over different lives.

Allocating the Dollar Amount
It is easiest to allocate a dollar amount to Class III assets first. The allocation should be made part of the sales contract so there will be no disputes when the actual form is filed. The form specifically asks if both parties agreed to the allocation of the sales price. The form also asks for both buyer's and seller's tax identification number. The form also goes as far as to request details of the sale such as covenants not to compete, employment contracts and lease arrangements.

It is important for the buyer and seller to be aware of this form, its requirements and the various ramifications to the tax treatment of the sale. The buyer and seller should consult the appropriate professional before finalizing the contract or they could end up with a tax problem that could have been avoided. This part of the negotiation should not be a deal breaker, but a well-informed buyer and seller will result in satisfied parties