How to Structure an Asset Allocation for Optimal Tax Benefits

When selling a business through an Asset Purchase Agreement (APA), the purchase price is allocated among various asset categories. This allocation can have significant tax implications for both the buyer and seller. Don’t leave this to chance as doing so will result in unplanned tax implications. Different assets are taxed differently during a sale or merger.

Here’s how to structure an asset allocation for optimal tax benefits.

Understanding Asset Allocation

Asset allocation involves assigning a portion of the purchase price to different asset classes, such as inventory, equipment, goodwill, and intellectual property. The allocation determines how each asset will be taxed.

Tax Implications for Buyers and Sellers

• For Buyers: A higher allocation to depreciable assets like equipment can lead to faster tax write-offs.

• For Sellers: Sellers prefer more allocation to capital gains assets, such as goodwill, which are taxed at a lower rate.

Steps to Optimize Asset Allocation

1. Categorize Assets
   Break down the business assets into categories such as tangible assets (furniture, fixtures, and equipment) and intangible assets (goodwill, intellectual property).

2. Negotiate Allocation
   Buyers and sellers should negotiate the allocation to balance their respective tax benefits. For example, allocating more to goodwill benefits the seller, while allocating more to equipment benefits the buyer.

3. Consult Tax Experts
   Both parties should consult tax professionals to understand the tax impact of the proposed allocation.

IRS Guidelines

The IRS requires both buyers and sellers to report the same allocation on Form 8594. Any discrepancies can trigger an audit.