Tax tips when buying the assets of a business

Insights by: Brian E. Raber CPA, MT

The process of acquiring the assets of a business presents unique tax challenges and opportunities. When purchasing the assets of a business the IRS requires the buyer and seller to mutually agree on the allocated purchase price to specific assets to determine their tax basis. Allocating more of the purchase price to quickly depreciable assets (like equipment) and less to long-term depreciable assets (like buildings) can result in significant tax savings after the acquisition to the buyer but could cause additional taxes to the seller. In some situations, it may make sense to get formal appraisals of the assets to support the purchase price allocations. Early involvement of tax advisors in negotiations can help to optimize tax outcomes. 

Buying business assets include purchasing the components of a business such as: 

• Tangible assets such as real estate, inventory, equipment, and furniture. 
• Financial assets such as accounts receivable, securities and other investments. 
• Intangible assets such as customer lists and contracts, licenses and permits, goodwill or brand name, and sometimes. 

There are some common misconceptions of buying business assets: 

• One misconception is the purchase price is the total cost. There are usually additional costs such as due diligence costs, legal fees, and integration expenses that come into play. 
• Another misconception is due diligence isn’t needed. Due diligence is critical to identify possible risks, liabilities, and hidden costs. 

Purchasing the assets of an S-Corporation and C-Corporation are different in several ways. But one of the main differences is that C-Corporations and their owners must deal with double taxation, whereas S-Corporations only have one level of taxation (at the owner level). C-Corporations are taxed at the entity level for the gains on the sale of the assets and again at the owner level when the dividends are paid to the owners. 

To understand fully, there is a difference between buying assets of a business versus buying the stock of a business. Buying the stock of a business allows the purchaser to “step into the seller’s shoes” and take over all assets and liabilities of the business at carry over basis.  The buyer assumes all legal liabilities/risks too – both known and unknown – because the corporation continues with new owners. When buying just the assets, the buyers can benefit from selecting just the assets they want to purchase, and the liabilities usually remain with the seller. The buyer also gets to start depreciation of those assets over at the price they paid. That allows the buyer to write off the entire purchase price.  The buyer will usually form a new entity to facilitate the acquisition, so the new company starts with a clean slate. 

It’s crucial to get both legal and financial advice to navigate the complexities of the transaction and ensure a favorable outcome. Engaging an attorney and an accountant that have experience with business acquisitions is strongly recommended. Contact 415 Group to help guide you through the process of purchasing business assets.

After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways:

1. Buy the assets of the business, or
2. Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership or LLC.

In this article, we’re going to focus on buying assets.

Asset purchase tax basics

You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset.

For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, software and intangibles such as customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions.

When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization).

Asset purchase results with a pass-through entity

Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes or an S corporation. In those cases, post-acquisition gains, losses and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold.

Asset purchase results with a C corporation

If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21%.

A tax-smart purchase price allocation

With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired.

To the extent allowed, you want to allocate more of the price to:

• Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables),
• Assets that can be depreciated relatively quickly (such as furniture and equipment), and
• Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years.

You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated.

You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another.

Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable.

Plan ahead

Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. We can help you get the former instead of the latter. So get your advisor involved early, preferably during the negotiation phase.

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