Purchase pre-existing business

[TaxprepP]

Have a client that purchased and pre-existing business. TP would like to capitalize as take annual deduction of purchase price (depreciation). TP paid flat amount for everything; tools, equipment, receivables, payables, etc. I know goodwill can be amortized but how best to determine? What about tangibles? Tried to research but cannot find any good answers.

[ATSMAN]

Have a client that purchased and pre-existing business. TP would like to capitalize as take annual deduction of purchase price (depreciation). TP paid flat amount for everything; tools, equipment, receivables, payables, etc. I know goodwill can be amortized but how best to determine? What about tangibles? Tried to research but cannot find any good answers.

If I recall correctly, in a situation where you pay a flat amount for a business, you have to allocate purchase price to all assets based on FMV and goodwill is what is leftover (if any)!

[TAXNJ]

Where

Have a client that purchased and pre-existing business. TP would like to capitalize as take annual deduction of purchase price (depreciation). TP paid flat amount for everything; tools, equipment, receivables, payables, etc. I know goodwill can be amortized but how best to determine? What about tangibles? Tried to research but cannot find any good answers.

Where did you research so far?

Have you tried, e.g. TTB (as one of many sources)

[TaxprepP]

If I recall correctly, in a situation where you pay a flat amount for a business, you have to allocate purchase price to all assets based on FMV and goodwill is what is leftover (if any)!

What is the best way to determine FMV to allocate?

[ATSMAN]

What is the best way to determine FMV to allocate?

I have not done one of them recently but the last time I did it it was a Pizza shop purchased by my client. All the equipment except for meat slicer was ancient. So we looked up used restaurant equipment that were similar on Craigslist and another website to determine FMV. My client absolutely did not want to pay a restaurant equipment broker for valuation because he got burnt once buying from brokers.

So I assume you could do something along those lines unless the business has assets that are not readily traded in the used equipment market.

[Lion]

Buyer and seller include Form 8594 with their returns for the year of buy/sell with the mutually-agreed-upon values.

[TaxprepP]

Buyer and seller include Form 8594 with their returns for the year of buy/sell with the mutually-agreed-upon values.

The business was actually purchased August 2012, computer repair business. The Taxpayer said the other tax preparer did not do anything with the business purchase. I’m not 100% sure, because I hadn’t seen the 2012 tax return only 2013. Right now have no idea if form 8594 was filed. There is no depreciation at all in the 2013 return. It appears I will need to see the 2012 return and if there was a purchase agreement.

[ttbtaxes]

You need to get all the facts

The first thing you need to do is get a copy of the purchase agreement and look to see if the purchase price was allocated in the agreement itself. If the agreement spells it out then get a copy of the 2012 tax returns to see if it was properly reported on Form 8594 and also properly depreciated/amortized on that return.

If there is no allocation in the agreement, then you will need to go back to the client and have the tangible assets appraised as of the date of the sale. The difference between tangible assets and the purchase price will be the total amount paid for intangibles. Look in the agreement to see if there was a covenant not to compete.

You clearly have some amended returns to file but you need to get a better handle on whether there was an allocation in the agreement and what was filed on all returns starting with 2012, the year of purchase/sale.

[TaxprepP]

The first thing you need to do is get a copy of the purchase agreement and look to see if the purchase price was allocated in the agreement itself. If the agreement spells it out then get a copy of the 2012 tax returns to see if it was properly reported on Form 8594 and also properly depreciated/amortized on that return.

If there is no allocation in the agreement, then you will need to go back to the client and have the tangible assets appraised as of the date of the sale. The difference between tangible assets and the purchase price will be the total amount paid for intangibles. Look in the agreement to see if there was a covenant not to compete.

You clearly have some amended returns to file but you need to get a better handle on whether there was an allocation in the agreement and what was filed on all returns starting with 2012, the year of purchase/sale.

Yep. I will do that, especially since the taxpayer claims that the former tax preparer did not do anything in regards to the business purchase. There maybe something there the taxpayer may not be aware of. Tax year 2013 is going to be amended anyway due to errors found in reporting sale of rental property. Thank you very much for your advice.