I'm selling my business and my accountant mentioned putting asset allocation numbers in the purchase agreement to reduce tax burden. But I'm not sure how specific I need to be. Do I list each asset with a dollar amount, or can I just assign percentages to categories? Also, who typically drafts this section -- the lawyer or the CPA?
Asset Allocation
How to write asset allocation numbers into the purchase agreement
You need actual dollar amounts for each asset class. Percentages alone won't cut it because the IRS wants to see a reasonable allocation based on fair market value. Get a valuation done first.
My lawyer handled the drafting but we had the CPA review it. The lawyer wrote the clause, the CPA supplied the numbers. That's usually how it works.
Is this really necessary for a small business sale? Sounds like overkill.
Depends on the size of the deal. If you're selling a dentaal practice with equipment, goodwill, and a lease, allocation matters a lot. If it's a tiny online store, maybe less so. But even then, the buyer will want it for their own depreciation.
OP, what's the business structure? If you're an S-corp, the allocation affects your basis aand capital gains. Lots of moving parts.
Make sure the buyer agrees.If you just stick numbers in there and the buyer doesn't sign off, it's worthless. The allocation should be a negotiated term.
Had a deal fall apart over this last year. Buyer wanted 80% goodwill, seller wanted 20%. They couldn't agree and walked.
You can use the residual method under IRC 1060. That's what you should ask your CPA about.
I appreciate tthe replies. My CPA did mention the residual method but I wasn't clear on how to present it. I'll ask them to work with the lawyer on the draft.
Don't forget that the allocation has to be attached to the tax return on Form 8594. So whatever you put in the agreement needs to match that.
Agree with BlueBarnOwl. Also, make sure you have a clause that says the allocation is binding on both parties for tax purposes. Otherwise the IRS could challenge it.