Supplies as part of purchase price

[oceanlovin'ea]

Client bought a auto striping business for $9,000.00. This covered the supplies the owner had accumulated such as pinstripe rolls and graphics. None of the purchase price was allotted to good will.
I don't think I have had this situation before. Well, a long time ago a client bought a restaurant. I think I depreciated the equipment that was part of the purchase price. But the equipment stays around.

The rolls and graphics will be used in the business. In fact, client listed cogs of around $2500 for 2014 which I am sure is part of the stuff he bought from the owner.
He is just a sole proprietor so I don't have to worry about balance sheets.

Is there something I am missing here?

Thanks
Linda, EA

[Jiggers]

Did the buyer AND the seller complete Form 8594, Asset Acquisition Statement? They are required to.

What does the bill of sale show? Or was there such a thing?

[ATSMAN]

Have not seen 8954 in many such cases

Unfortunately in many small business sales where the buyer and seller basically "shake hands and pay cash" there is no form 8594. The purchase and sale is usually made by themselves without any legal advice and serves merely as a receipt of the amount paid.

We have to then recreate the 8594 based on the assets purchased and other facts and circumstances.

[kathyc2]

Client bought a auto striping business for $9,000.00. This covered the supplies the owner had accumulated such as pinstripe rolls and graphics. None of the purchase price was allotted to good will.
I don't think I have had this situation before. Well, a long time ago a client bought a restaurant. I think I depreciated the equipment that was part of the purchase price. But the equipment stays around.

The rolls and graphics will be used in the business. In fact, client listed cogs of around $2500 for 2014 which I am sure is part of the stuff he bought from the owner.
He is just a sole proprietor so I don't have to worry about balance sheets.

Is there something I am missing here?

Thanks
Linda, EA

Did your client actually buy a business or inventory? Did your client take over name, phone number, employees, location? Or, did they simply buy a bunch of inventory from someone getting out of business?

If customers are heavily recurring such as applying graphics to a business fleet, did they take over contracts? Did they receive old company customer list and records?

[taxea]

I would attribute these items to materials used in the course of the business and normally expense them. I think you are okay with them included in the purchase price without making any special allocations for them. I doubt that, in this type of business, the owner charges the client per inch or per foot of the material. Leave it as is and move on from here.

[oceanlovin'ea]

sorry about delay getting back to this

There is a bill of sale. It lists 4 items: pinstripe rolls, graphics, mouldings, vinyl decals and assigns a value to each of them. The total was $10,000. No 8594 was filled out.

I would say that he purchased the supplies. He is using his own business name (which he used 35 years ago doing same work). He has taken over the businesses that were serviced by the previous owner. Several dealerships that he weekly goes to do do striping on vehicles on the lots. It is a mobile business.

He also purchased the van used in the business from the other man. I put that in as an asset and will depreciate it.

I am quite sure that the cost of goods sold that he put on his worksheet he gave to me came from the $10,000 of supplies that he purchased. But I can ask to be sure. Would you expense those supplies as he uses them each year? Or would you deduct them all this year? Of course he is a cash basis business. Also it is a schedule C, sole proprietorship.

Thanks

Linda, EA

[kathyc2]

If the 10K is in line to what he would have paid to a distributor, I'd just count the amount as an inventory purchase. I'd also set up inventory valuation as LCM rather than cost, as you may want to write off some obsolete inventory in the future without physically disposing of it.

Unless you can justify that the striping, etc. is incidental to sales, it should be treated as inventory and written off as COS as used or obsoleted. If no other purchases were made your COS section should look similar to below:
Beginning inventory: 0
Purchases: 10,000
Inventory EOY: 7,500
COS: 2,500

[taxea]

For the type of business he is in, I would consider all the pinstripe rolls, graphics, mouldings, vinyl decals as materials used and expense them. When you buy a 10 ream box of paper would you allocated it to the amount you used during the year and call the balance on hand inventory or do you expense it as materials/supplies of sale?

[kathyc2]

For the type of business he is in, I would consider all the pinstripe rolls, graphics, mouldings, vinyl decals as materials used and expense them. When you buy a 10 ream box of paper would you allocated it to the amount you used during the year and call the balance on hand inventory or do you expense it as materials/supplies of sale?

No, the paper in a tax office is incidental. Mine will run around .1% of revenue. I'm guessing the stripe, etc. will run over 20% of sales, so IMO it is not incidental.

I know in tax the terms materials and supplies is sometimes used interchangeably, but coming from an accounting background there is a big difference between the two terms.

[TaxGuyBill]

Would you expense those supplies as he uses them each year? Or would you deduct them all this year?

Are you going to claim the $500 'de minimis' safe harbor? Is each item $500 or less? If so, you need to deduct them this year. If not, read 1.162-3(a).

In a nutshell, 1.162-3(a) says if they are not inventory and "no record of consumption is kept or of which physical inventories at the beginning and end of the taxable year are not taken", they can be deducted in the year of purchase. If they keep track of the quantities, then you deduct them when they are used.

http://www.ecfr.gov/cgi-bin/text-idx?SID=ebe17af60260af0b197e473b99fd5e4a&node=se26.2.1_1162_63&rgn=div8

[kathyc2]

Are you going to claim the $500 'de minimis' safe harbor? Is each item $500 or less? If so, you need to deduct them this year. If not, read 1.162-3(a).

In a nutshell, 1.162-3(a) says if they are not inventory and "no record of consumption is kept or of which physical inventories at the beginning and end of the taxable year are not taken", they can be deducted in the year of purchase. If they keep track of the quantities, then you deduct them when they are used.

http://www.ecfr.gov/cgi-bin/text-idx...62_63&rgn=div8

I believe this is talking about purchases made for internal use rather than purchases made for resale.

[TaxGuyBill]

I admit, I originally misunderstood what the items were for. They may be 'inventory', which would eliminate the second part of my original answer from being used. However, the first part of my original answer PROBABLY still applies.


If the taxpayer is a "qualifying" taxpayer, they get to treat "inventoriable items as materials and supplies that are not incidental". If that is the case, the $500 'de minimis' election still applies.

http://www.irs.gov/publications/p538/ar02.html#en_US_201212_publink1000270704

[oceanlovin'ea]

He will use the pin striping rolls as he does the pin striping on the vehicles. I am assuming the same with the other items he purchased.

He purchased the business in October and used a quarter of the materials or inventory (whichever we call it) during that time. So I am assuming that the majority of the materials will be used up this year and more purchased.

you have all seen vehicles with pin striping on the sides or back of them. Or sometimes a customer will want some kind of a decal or trim work on a particular vehicle. He works for the dealers and puts on the vehicles whatever they want on there.

I will talk to them this week and get this cleared up with a better explanation.

Linda, EA