Rule of thumb for asset split

I always try to avoid agreeing to a purchase price allocation in the transaction documents when I represent Buyers. This way, Buyers can value the assets based on supporting evidence or appraisals. There is nothing in the tax law that say a Buyer and Seller have to agree, but the tax law does say if you do agree in writing then both parties must file consistently. Upon IRS audit, they can change the allocation if they disagree with the allocation, but it would likely have to be abusive for them to want to make the change. When I represent Sellers, I always push to agree to a purchase price allocation in the transaction documents in order to minimize ordinary income and maximize capital gain income. The difference in tax rates can be as high as 17%, which can be meaningful.

Hi Michael -
The IRS has set this up so generally the buyer and seller want the opposite treatment. So in the absence of other buyer/seller rationale, we place inventory at the lower of cost or current market, FF&E/PPE at the the current used market value for the equipment in its current state, and the remainder is goodwill. With accelerated deprecation and Section 179 tax rules, it is more common than not to find that FF&E/PPE has a very low tax book value -- the seller would like to leave the assigned value here to avoid depreciation recapture tax, but that leaves the buyer with a very low basis to begin their depreciation -- hence the current market value is fair to both.