Are you’re considering buying or selling a business? Or are you in the process of a business merger or acquisition? If so, it is important that both parties report the transaction to the IRS in the same way. Otherwise, you may increase your chances of receiving an IRS audit.
It is common for a sale to involve business assets, rather than stock or ownership interests. In the situation of business assets, the buyer and the seller must generally report to the IRS the purchase price allocations that both use. This is done by attaching IRS Form 8594, “Asset Acquisition Statement,” to each of their respective federal income tax returns for the tax year that includes the transaction.
When buying business assets in an M&A transaction, you must allocate the total purchase price to the specific assets that are acquired. The amount allocated to each asset then becomes its initial tax basis. For depreciable and amortizable assets, the initial tax basis of each asset determines the depreciation and amortization deductions for that asset after the acquisition. Depreciable and amortizable assets include:
In addition to reporting the items above, you must also disclose on Form 8594 whether the parties entered into a noncompete agreement, management contract or similar agreement, as well as the monetary consideration paid under it.
The IRS may inspect the forms that are filed to see if the buyer and the seller use different allocations. If the IRS finds use of different allocations, auditors may dig deeper and the investigation could expand beyond just the transaction. So, it’s in your best interest to ensure that both parties use the same allocations. Consider including this requirement in your asset purchase agreement at the time of the sale.
There are complications to the tax implications of buying or selling a business. Price allocations are important because they affect future tax benefits. Both the buyer and the seller need to report them to the IRS in an identical way. Doing so will avoid any unwanted attention. To lock in the best post-acquisition results, consult with us before finalizing any transaction.