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Ask Lane Your Own Question
Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 10163
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Just completed an asset purchase of a small software

Customer Question

Just completed an asset purchase of a small software company. No cash, no a/r, no personal property assets. Just a proprietary software platform, 20 subsciption based customers (monthly) and a services/non-compete agreement. Purchase was made with cash, an escrow agreement and an earnout agreement. I need help in completing form 8594
Submitted: 12 months ago.
Category: Finance
Expert:  PDtax replied 12 months ago.

Hi from just answer. I'm PDtax.

Do you have a sales contract covering the allocations?

Customer: replied 12 months ago.
No, we didn't agree on allocations prior to the close
Customer: replied 12 months ago.
THe total amount of the sale was $215K. With 32K placed in escrow, 42K in earn out contingent on revenue hurdle and 25% equity in the new entity (LLC) issued to the seller
Expert:  PDtax replied 12 months ago.

I can help, but there is some work to do to review your contract and the terms of purchase. The price offered is low for that much work.

I will post an offer of additional service to assist. One hour of professional time should do it.

Accept, and I will ask you to send me a copy of your contract. The offer allows for private transmissions back and forth.

Customer: replied 12 months ago.
No I am not interested.
Expert:  PDtax replied 12 months ago.

Then I will opt out. Other experts can review your request and advise.

Expert:  Lane replied 12 months ago.

Hi,

...

I hold a JD (Juris Doctorate, a doctoral degree in the law), concentration in Tax Law & Corporate law, an MBA (specialization in finance & tax), and BBA from Mercer University's Stetson School of Business and Economics, as well as CFP and CRPS designations.

...

I agree that you've asked a question here that cannot be answered without MUCH more information and that this is grossly under-priced.

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I'll weigh in here with some information that might get you to the place where this task CAN be done with some certainly.

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First, IRS will expect both the buyer AND seller to complete the 8594, and will expect both forms to agree, so completing the form without deciding these issues is at best a guess, and at worst will have IRS asking for more and/or reclassifying how the allocations were made (both, potentially, because assets aren't being reported correctly, such as section 197 intangibles like goodwill, and/or because the two forms don't agree).

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This discussion between buyer and seller, in my experience with clients, although a give and take process, will pre-empt MANY problems down he road.

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The reason for potential disagreement comes from the differences in perspective, viewpoint between buyer and seller.

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From the buyer's perspective, asset sales (as opposed to stock sales) allow buyers to "step-up" the company's depreciable basis in its assets.

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So by allocating a higher value for assets that depreciate quickly (like equipment, which typically has a 3-7 year life) and by allocating lower values on assets that amortize slowly (like goodwill, which has a 15 year life), the buyer can gain additional tax benefits.

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(reduces taxes sooner and improves the company's cash flow for the first few years)

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From the seller's perspective, asset sales generate higher taxes because while intangible assets, such as goodwill, are taxed at capital gains rates, other "hard" assets can be subject to higher ordinary income tax rates.

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And this on is essentially ALL intangible ... but still, first things first is to have that conversation.

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The issues of HOW you financed, escrow is not relevant... AND accounting for the earnout will be an issue (very possibly should not be included in the sale price at all, because of the inability to assign a current value ( based on GAAP convention of conservatism )

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LOTS of work to do here, and SHOULDN'T BE done without input from both buyer and seller.

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