Price Allocation in an Asset Sale

Why it matters

Most small deals, in the range of ninety percent or more by one count, are asset sales. The buyer takes the assets and goodwill, while the seller usually keeps cash and receivables for completed work.

The tax result depends on how the price is divided and on the structure of the deal.

The usual categories

• Equipment and vehicles
• Inventory
• Intellectual property and the customer list
• A non compete agreement
• Goodwill, which is the remainder

Different categories, different tax

Each category can be taxed differently. As a simple example, a sale at one million dollars on assets with a book value of five hundred thousand dollars produces roughly five hundred thousand of gain, but the real tax depends on your bracket and the mix.

Selling equipment for more than its book value can trigger depreciation recapture, so ask your CPA to model it.

What buyers prefer

Buyers like allocations that depreciate quickly. Goodwill is written off over a long period, which buyers value less.

That tension is why the allocation should be negotiated openly rather than assumed.

The matching forms

Buyer and seller each report the allocation to the IRS on a form that must match. Mismatches can draw questions, so ask your CPA to confirm the filing and timing.

An example of the split

Imagine a contractor sells for eight hundred thousand dollars. Trucks and tools might be assigned a value near their book numbers, inventory its cost, a non compete a modest amount and goodwill the rest.

Each slice carries its own tax treatment, so a small shift in numbers can move your bill by thousands.

Settle it before you sign

Do not leave the allocation to be decided later. Put the schedule in the purchase agreement, with your CPA's review, and keep it with your closing records.

Next, read about seller financing notes, then find your price range.