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Posted by Rashid on January 28, 2007, 6:13 pm
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I have a service business that I am thinking about selling.
The business has some equipment the fair market value of
which is about $5K. I purchased these equipment about 5
years ago for $10K which I depreciated under section 179.
The sale price of the business is $100K. My questions are
(1) Should I allocate the entire purchase price (100K) to
the equipment ? Can or shoudl I do that? If I do that, is
the gain going to be taxed at ordinary rate or long term
capital gain rate?
(2) If I allocate fair market value (5K) to equipment and
the rest of the sale price ($95K) to goodwill, what will be
the cost basis of the goodwill. Can it be zero? I did not
pay for any goodwill. I created the value of my business
over the years.
(3) If I can allocate 95K to goodwill, and the basis of
goodwill is zero, I will have a long term capital gain of
$95K and pay tax at long tern capital gain rate. Am I
correct?
Your advice or comment will be highly appreciated.
Thanks
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Posted by Bill Brown on January 29, 2007, 2:11 am
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> I have a service business that I am thinking about selling.
> The business has some equipment the fair market value of
> which is about $5K. I purchased these equipment about 5
> years ago for $10K which I depreciated under section 179.
> The sale price of the business is $100K. My questions are
>
> (1) Should I allocate the entire purchase price (100K) to
> the equipment ? Can or shoudl I do that? If I do that, is
> the gain going to be taxed at ordinary rate or long term
> capital gain rate?
No. Apply the FMV of the equipment to the equipment. THat
portion of the gain will be taxed as ordinary income under
IRC Section 1245.
> (2) If I allocate fair market value (5K) to equipment and
> the rest of the sale price ($95K) to goodwill, what will be
> the cost basis of the goodwill. Can it be zero? I did not
> pay for any goodwill. I created the value of my business
> over the years.
Your basis in good will is zero. Any costs you incurred
creating that goodwill has already been expensed.
> (3) If I can allocate 95K to goodwill, and the basis of
> goodwill is zero, I will have a long term capital gain of
> $95K and pay tax at long tern capital gain rate. Am I
> correct?
Presuming you sold no other identifiable assets such as
customer lists, trademarks, leaseholds, etc., then yes.
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Posted by Shyster1040 on January 29, 2007, 2:30 am
Please log in for more thread options (1) First, if you allocate all $100k to the equipment you
will get audited for sure. Under the rules, see, e.g., IRS
Pub 544, you (and the buyer) are required to allocate the
purchase price according to the "residual method" under
which the purchase price is first allocated to tangible
assets, then to a variety of other classes of assets, and
anything left over at the end is allocated to goodwill.
(2) Your goodwill is self-generated and will almost
certainly have a basis of $0.
(3) You will almost certainly have $95k in long term capital
gain from the sale of the goodwill.
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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Posted by Phoebe Roberts, EA on January 30, 2007, 11:50 am
Please log in for more thread options Shyster1040 wrote:
> (1) First, if you allocate all $100k to the equipment you
> will get audited for sure. Under the rules, see, e.g., IRS
> Pub 544, you (and the buyer) are required to allocate the
> purchase price according to the "residual method" under
> which the purchase price is first allocated to tangible
> assets, then to a variety of other classes of assets, and
> anything left over at the end is allocated to goodwill.
On a related note, I have a taxed-as-partnership client that
sold assets (including goodwill) in 2006. The only written
documents concerning the purchase show that the buyer
acquired fixed assets at NBV. I believe that the fixed
assets have significantly more FMV, since the sellers took
maximum Sec 179 each year and NBV is next to nothing. Upon
being asked to suggest an asset allocation, the buyers'
in-house accounting staff (whom I believe to be relatively
sophisticated) replied "We allocated $XXX to fixed assets,"
where $XXX = NBV.
My guys want to get the tax return done and over with, but
they also don't want to amend in the future or tick off the
buyers (for whom the sellers now work). My worry is that
when the buyers' CPA gets a hold of the books, a new asset
allocation will be suggested (and my guys will have amended
returns with a significant increase in tax).
Anyone have any thoughts on the best way to handle this?
Phoebe :)
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2006) - All rights reserved. >>
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Posted by Drew Edmundson on January 30, 2007, 10:11 pm
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> On a related note, I have a taxed-as-partnership client that
> sold assets (including goodwill) in 2006. The only written
> documents concerning the purchase show that the buyer
> acquired fixed assets at NBV. I believe that the fixed
> assets have significantly more FMV, since the sellers took
> maximum Sec 179 each year and NBV is next to nothing. Upon
> being asked to suggest an asset allocation, the buyers'
> in-house accounting staff (whom I believe to be relatively
> sophisticated) replied "We allocated $XXX to fixed assets,"
> where $XXX = NBV.
>
> My guys want to get the tax return done and over with, but
> they also don't want to amend in the future or tick off the
> buyers (for whom the sellers now work). My worry is that
> when the buyers' CPA gets a hold of the books, a new asset
> allocation will be suggested (and my guys will have amended
> returns with a significant increase in tax).
If a written agreement exists, the rules under Section 1060
require you to use the allocation in the agreement. Only
IRS can change the allocation without amending the
agreement.
--
Drew Edmundson, CPA
Cary, NC
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
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