Allocating Sales Price for Your Business
How Should I Allocate Sales Price for My Business?
When assets of a going concern are sold to a single buyer, the buyer and seller generally must allocate the purchase price among tangible and intangible assets being sold. Sellers should allocate as much of the purchase price as possible to assets that yield capital gains, rather than ordinary income. Fair market value can’t always be determined with mathematical precision, so there’s often room to maneuver. Many purchased intangible assets that buyers used to write off, such as covenants not to compete, now can’t be written off over less than 15 years. So buyers may want to enter into consulting agreements to shift allocation away from the covenant and get more immediate tax benefit. Although covenants and consulting fees are taxable as ordinary income, sellers should remember that consulting agreements generally require them to perform services, while covenants not to compete do not.
