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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11611
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Megan, help me with this question: Owner of Company A

Customer Question

Hello Megan, help me with this question:
Owner of Company A invested 100k to buy a business (a restaurant), so he paid 100k to the owner of that business and now he is the owner. 50K of those 100k are restaurant equipment, could I documents 50k as an expense and the 50k for the equipment as an asset?, or I have to document the entire 100k as an asset?
thank you
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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IRS will be looking for form 8594 here (and this relates to the answer here).

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None of this would be an expense. The purchase of a business is either a stock sale or an asset sale. ... And since you've mentioned that 50% was for equipment, (unless the client tells you differently) this is an asset sale.

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But regardless of whether there's (1) an investment (purchase) of the stock, a stock sale - where the buyer just steps into the shoes of the seller, buying EVERYTHING, (assets, liabilities, any licenses and permits, name of the company, etc.) ... OR .... (2) buying certain or all assets, an asset sale, the purchase is never an expense ... it's capitalized ... its an investment of the buyer.

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Now, back to that 8594: Form 8594

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IRS generally does not care how the class allocations are made, as long as the buyer and the seller use consistent treatment.

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Form 8594 allocates the entire purchase/sale price of the business into the various classes of assets, and both the buyer and the seller are required to file the form with their tax returns. The allocations should also be delineated in the sale/purchase agreement.

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Best practice here is to allocate among the seven generally accepted asset classes:

Class I – Cash and Bank Deposits
Class II – Actively Traded Personal Property & Certificates of Deposit
Class III – Debt Instruments
Class IV – Stock in Trade (Inventory)
Class V – Furniture, Fixtures, Vehicles, etc.
Class VI – Intangibles (Including Covenant Not to Compete)
Class VII – Goodwill of a Going Concern

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The seller usually wants to to designate more sales price to goodwill and minimize any allocation to furnishings and equipment, because goodwill being a capital asset, the sale getting capital gain treatment or the seller, while the sale of furnishings and equipment are taxed as ordinary income (hence, can be taxed as high as 39.6%).

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The o course, the buyer will want to have as much as possible designated as furnishings and equipment, since they can bedepreciated over a short period of time (usually 5 or 7 years) as opposed to a 15-year amortized write-off of the goodwill.

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Sounds like what they've done here is try to be fair and split things down the middle, with half being the equipment and half being goodwill.

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But, again, neither is an IMMEDIATE expense. You'll capitalize both, writing off the equipment over it's class life (here's an EXCELLENT table published by IRS showing whether the different typs of assets restaurants use is §1245 property (shorter cost recovery period property, 5 or 7 years) or §1250 property (longer cost recovery period property, 39, 31.5 or 15 years). The most common example of §1245 property is depreciable personal property, such as equipment.

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http://www.irs.gov/Businesses/Cost-Segregation-Guide---Chapter-7.2-Industry-Specific-Guidance---Restaurants

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So you'll book the property to it's appropriate depreciation group and the other 50% to goodwill, but both of these are capital assets for the buyer.

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Hope this helps to clarify

Customer: replied 1 year ago.
The new owner did pay to buy stock, the old owner closed his LLc and paid his liabilities, the new owner opened a new LLc under him as a new owner, yes he paid 50k for equipment that will be considered as an asset but the other 50k he paid for was just a fee that the old owner asked for to leave, so why not this last 50k can not be considered as an expense?, there is nothing to depreciate ..
Customer: replied 1 year ago.
i mean the new owner DID NOT PAY FOR STOCK, sorry
Expert:  Lane replied 1 year ago.

I understand ... If you'll read, you'll see that I said that this was likely an asset sale because of you mentioning the equipment.

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SO that takes us back to 1/2 goodwill and 1/2 equipment ... But again, these are all capital assets.

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You'll depreciate equipment according to its lass life (likely 7 & 5 year) ... And the other 50k (goodwill) is at 15

Customer: replied 1 year ago.
oh ok, understood :-)
Expert:  Lane replied 1 year ago.

Glad I could help ... let me know if you have further questions on this.

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If this HAS helped, and you don't have additional questions on this, I'd appreciate a positive rating (by clicking the stars or smiley faces on your screen) ... that's the only way I'll be credited for the work here.
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Lane

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