Quick take
- The price is divided among equipment, inventory, intangible assets, a non compete and goodwill
- Different pieces can be taxed differently, so the split affects your net
- Both sides report the same split to the IRS, and the forms must match
- Agree on the allocation before signing, not after
What Allocation Means
In an asset sale, the buyer is purchasing a collection of things. These include equipment, vehicles, inventory, intellectual property, a non compete agreement and goodwill.
The purchase price is divided among those groups. Goodwill is generally the leftover amount after the other pieces are valued.
Why It Changes Your Taxes
Categories can be taxed differently. Equipment sold for more than its book value can trigger depreciation recapture, which is taxed in a different way than a gain on goodwill. Your CPA can model the effect for your situation.
A simple example shows the idea. A sale price of one million dollars on assets with a book value of five hundred thousand creates a gain of about five hundred thousand. How much tax you owe depends on your bracket and the structure.
What Buyers Prefer
Buyers often prefer assigning more value to items that can be written off quickly, since that improves their cash flow. Goodwill is usually written off over a long period, which is less attractive to them.
The two sides have different interests, so the split is negotiated like any other term.
Matching Forms
Both buyer and seller file an IRS form that reports the allocation. The numbers on those forms have to match, or the mismatch can raise audit questions. Ask your CPA to confirm the form and the timing.
Settle It Before You Sign
Do not leave the split to be decided later. Arguing about it after the price is agreed gives the buyer an advantage and makes closing harder. Put an allocation schedule in the purchase agreement.
Ask your CPA to review at the letter of intent stage, when you still have room to adjust terms.
Installment Payments
When part of the price is paid over several years, the tax on the gain may be spread across those years. Ask your CPA whether an installment approach suits your deal. For payment terms, read seller financing terms.
Where This Shows Up
Equipment heavy companies feel it most, such as the businesses described on the lawn care and marine service pages. A non compete is its own piece, covered in transition and non compete terms.
This page is general information and not tax or legal advice. Confirm your own numbers with your CPA.
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