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Mark Anderson
Mark Anderson, Tax Attorney
Category: Tax
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Experience:  Tax attorney and accountant
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Last year I bought a Liquor Store. I paid 625,000 business

Customer Question

Last year I bought a Liquor Store. I paid 625,000 for the business (I did an asset purchase) - inventory was separate. My accountant wants to assign the whole number to "Goodwill" which of course is amortize in 15 years. I actually did an asset purchase because they told me I could assign a reasonable number to Building, fixtures and equipment and get the tax benefit of depreciation. She claims that the assets have already been depreciated, but it makes no sense to me to not have an value at all on tangible assets.
Submitted: 6 months ago.
Category: Tax
Expert:  Mark Anderson replied 6 months ago.

Was it allocated as part of your purchase agreement?

http://www.straza.com/articles/allocation-of-purchase-price.htm

Expert:  Mark Anderson replied 6 months ago.

http://www.straza.com/articles/tax-implications.htm

Expert:  Mark Anderson replied 6 months ago.

The above link indicates that the buyer establishes the basis.

Expert:  Mark Anderson replied 6 months ago.

Might want to show it to your accountant.

Customer: replied 6 months ago.
No the lawyer didn't do an allocation
Expert:  Mark Anderson replied 6 months ago.

The IRS provides guidance on allocation:

https://www.irs.gov/publications/p551/ar02.html

Land and Buildings

If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings.

Figure the basis of each asset by multiplying the lump sum by a fraction. The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. If you are not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes.

Customer: replied 6 months ago.
I can allocate whatever number I want? She said that those assets were already depreciated by the seller. Also, she said that I will have to pay Personal Property tax
Expert:  Mark Anderson replied 6 months ago.

Did you acquire this business as a part of a 1031 exchange?

Customer: replied 6 months ago.
No..
Expert:  Mark Anderson replied 6 months ago.

The IRS Pub says you can allocate based upon FMV:

Trade or Business Acquired

If you acquire a trade or business, allocate the consideration paid to the various assets acquired. Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the following order.

  1. Certificates of deposit, U.S. Government securities, foreign currency, and actively traded personal property, including stock and securities.

  2. Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes.

  3. Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business.

  4. All other assets except section 197 intangibles, goodwill, and going concern value.

  5. Section 197 intangibles except goodwill and going concern value.

  6. Goodwill and going concern value (whether or not they qualify as section 197 intangibles).

Agreement. The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. This agreement is binding on both parties unless the IRS determines the amounts are not appropriate.

Reporting requirement. Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Use Form 8594 to provide this information. The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred.

Expert:  Mark Anderson replied 6 months ago.

It may be depreciated to the seller. However, you bought it. Your cost or basis in the assets can be allocated according to the FMV. I would show your accountant Pub 551.

Expert:  Mark Anderson replied 6 months ago.

Maybe your accountant wants to accelerate your deductions by amortizing it as goodwill instead of real estate that is over 39 years.

Customer: replied 6 months ago.
It is actually not real estate. it is equipment and fixtures which be depreciable in 5 years correct?
Expert:  Mark Anderson replied 6 months ago.

This also says FMV:

http://www.gilaberttax.com/2013/08/05/purchase-price-allocation-how-you-can-add-value-in-an-asset-sale/

Expert:  Mark Anderson replied 6 months ago.

I am not sure. This says 10:

http://cs.thomsonreuters.com/ua/fixa/cs_us_en/ass_life_tbl/hid_help_asset_lives.htm

Expert:  Mark Anderson replied 6 months ago.

http://www.gilaberttax.com/2013/08/08/purchase-price-allocation-example/

Expert:  Mark Anderson replied 6 months ago.

This says it varies:

http://www.watsoncpagroup.com/kb/Purchase-Price-Allocation_251.html

Expert:  Mark Anderson replied 6 months ago.

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