When you’re buying an existing business that has assets used in a trade or business, you have to calculate the amount of the purchase cost that is associated with the assets being bought and the amount of goodwill (the amount that is paid over the fair value of the assets).
This may seem trivial but consider the following: Assets are depreciated over their useful lives, usually between 5 and 7 years in most cases. However, goodwill is amortized over 15 years. This makes it two to three times longer to recapture the cost of goodwill than for fixed asset. Making it more advantages for the purchaser to assign the purchase cost to the fixed assets rather than to goodwill. The opposite is true for the seller, because if they treat it as goodwill, they can claim it as capital gains that are taxed at 15% rather than ordinary income that is taxed at their individual tax rate that is usually higher then 15%.
For this reason, the IRS requires that both the seller and purchaser treat the purchase cost of the business the same and fill out Form 8594 Asset Acquisition Statement. Contact us at 1-866-287-9604 with any questions.
Posted by Nathan Thieneman, CPA, CFE