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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10100
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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My client is buying a business. Part of the purchase includes

This answer was rated:

My client is buying a business. Part of the purchase includes janitorial service contracts that typically extend for several years. My question is whether the contracts will be amortized over 15 years, or over the life of the contract. thank you.

Lane :

Hi,

Lane :

If there is a lump sum being paid, then this is a purchase of goodwill and can be depreciated of 15 years

Lane :

The seller will get capital gains treatment and the buyer depreciates over 15years

Lane :

Here's your citation:


Section 197(a) provides that a taxpayer is entitled to an amortization deduction
with respect to any amortizable section 197 intangible. The amount of the deduction is
determined by amortizing the adjusted basis (for purposes of determining gain) of the
intangible ratably over the 15-year period beginning with the month in which the
intangible was acquired.

Lane :

Hope you're doing well Christine ... good to see you again ... questions ? ... (This is always one where it's fun to answer for the seller and not so fun for the buyer :)

Lane :

Sorry, that had the code citation, but the revenue ruling was 2004 - 49 ... www.irs.gov/pub/irs-drop/rr-04-49.pdf‎

Lane :

... still don't see you coming into the chat here ... I'll move us to "Q&A." in the event you have questions ... Let me know

Lane :

Lane


Hi Christine,

... just checking back in here.

If you have further questions, let me know.


Lane
Customer: replied 3 years ago.

Hi Lane; sorry I missed your chat. I often don't get these relays on a timely basis for some reason. Don't I want to differentiate between the service contracts and goodwill? Right now, the purchase is broken into the following categories:

1. Non-compete covenant

2.Goodwill

3.Equipment

4. Inventory

5. Service Contracts

 

Thank you for your assistance on this.

Chris

 

 

Sure, here's the breakdown:

 

 

 

 

Again, GOODWILL

 

Seller: If held for more than one year, is long-term capital gain

 

Buyer: Amortize over 15 years

 

 

 

 

EQUIPMENT (trade fixtures, furniture, equipment):

 

Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income

 

Buyer: Establishes basis, depreciate per IRS schedules

 

 

 

 

COVENANT NOT TO COMPETE (include time and distance of covenant):

 

Seller: Ordinary income as received

 

Buyer: Amortize over 15 years GOODWILL Seller: If held for more than one year, is long-term capital gain Buyer: Amortize over 15 years

 

 

 

 

INVENTORY

 

Seller: Ordinary income, to the extent that it is over basis

 

Buyer: Treated as "cost of goods sold" upon sale of products Customer Lists (Contracts) Seller: Ordinary income as received Buyer: Amortize over 15 years

 

 

 

 

CUSTOMER LIST (Service contracts)

Seller: Ordinary income as received

Buyer: Amortize over 15 years

 

 

 

 

 

Here's a great reference:

 

http://www.bizquest.com/resource/allocation_of_purchase_price-75.html

 

 

 

 

Lane

 

Positive feedback, highly appreciated.

 

BUT ... Questions? ... Come back here

 

 

 

 

Lane and other Tax Specialists are ready to help you
Hi Christine,


I'm just following up with you to see how everything is going. Did my answer help?


Let me know,
Lane

Thanks Christine,

Lane

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