Tax treatment of business purchase cost

[Sudhir]

Hi:

A cash basis schedule C tax payer (TP) purchases a business for $22,000 that included $500 in attorney fees and $2,200 in security deposit for rent that was to be paid for the building owned by the seller of the business. The entire amount of $22,000 was financed by the seller including the attorney fees and security deposit. How should buyer treat the attorney fees and the security deposit. Can the attorney fees be expensed on schedule C and the $2,200 treated as rent expense if it was applied towards rent by the landlord? Should the remainder of the amount financed $19,300 that included goodwill and equipment be amortized and depreciated respectively? Thank you.

[ATSMAN]

Hi:

A cash basis schedule C tax payer (TP) purchases a business for $22,000 that included $500 in attorney fees and $2,200 in security deposit for rent that was to be paid for the building owned by the seller of the business. The entire amount of $22,000 was financed by the seller including the attorney fees and security deposit. How should buyer treat the attorney fees and the security deposit. Can the attorney fees be expensed on schedule C and the $2,200 treated as rent expense if it was applied towards rent by the landlord? Should the remainder of the amount financed $19,300 that included goodwill and equipment be amortized and depreciated respectively? Thank you.

If I understand the facts correctly this was a 100% seller financed purchase?

So there will be business interest deduction.

The security deposit is technically not rent so if he deducts it as rent he must add it back as income upon return. Is it going to be applied to rent this year?

You have to sort out the rest what is equipment, inventory etc. Good will is last on the list!

[Sudhir]

If I understand the facts correctly this was a 100% seller financed purchase?

So there will be business interest deduction.

The security deposit is technically not rent so if he deducts it as rent he must add it back as income upon return. Is it going to be applied to rent this year?

You have to sort out the rest what is equipment, inventory etc. Good will is last on the list!

Thank you for taking the time to respond. It is very much appreciated.