1. Purchase Price Allocation
2. Noncompete Covenants in Mergers and Acquisitions: Compensation or Capital Gain?
3. Calculating Additional Tax Deductions

Allocation of purchase price to noncompete refers to the specific parts of a business that are included in a sale. There are many things to consider in addition to the cost of the business. Additionally, if a noncompete is required during the sale, there are added values to consider.

Purchase Price Allocation

Purchase price allocation specifically allocates and specifies the purchased parts of the business. When a business is purchased, the sale usually only includes the assets of the business. There are many factors that can affect the purchase price of a business:

  • Nontransferable items present: This includes liquor licenses or government contracts.
  • Tax implications: Competing interests in regards to tax implications can affect the price.
  • Cash and investments: In most asset sales, cash and investments stay with the seller.
  • Accounts receivable: This is income that has already been earned by the seller, but has not yet been collected.

In most business sales, the seller is looking for as many tax deductions as possible. On the other hand, the buyer is looking for a sale that includes a lot of assets with capital gains. Evaluating the purchase price allocation is an extremely complex situation and requires careful review of accounting methods and assets included in the purchase sale.

It is also important to evaluate any assets included that are eligible for depreciation. This can further affect the sale price. There are two types of elements of gain possible when dealing with depreciation:

  • Recapture of depreciation
  • Capital gain

The allocation of purchase price is one of the most important parts of the business sale transaction. Most tax professionals will utilize the following method to determine the purchase price allocation:

  • Value all assets acquired
  • Determine what amount needs to be allocated
  • Assign values to each of the seven asset categories

This calculation is extremely important because it will determine how the funds are taxed. Some businesses do not calculate the purchase price allocation until the end of the sale. This can be a costly mistake. Instead, the seller should begin drafting an allocation of purchase price right after receiving an intent to purchase offer.

Noncompete Covenants in Mergers and Acquisitions: Compensation or Capital Gain?

Some business sales include noncompete agreements. The noncompete agreement may also be accompanied by a nondisclosure document. Noncompetes in a business sale can be difficult to legally enforce and are a disadvantage in terms of taxes for both the buyer and the seller. If a noncompete is needed, the value and length of contract should be kept low for both parties.

A noncompete is common when the seller played an important role in the day-to-day activities of the business. There are tax implications when using a noncompete agreement. A noncompete agreement can be taxed because the seller is losing out on potential income. Additionally, the business is sometimes gaining the expertise of the seller during the transitionary period and a value needs to be assigned to this.

Some buyers will attempt to correct this problem by assigning a specific value to the noncompete document. However, this usually only helps with assigning a value during litigation and is not the accepted tax value. Since there are a lot of factors to consider when calculating the taxable amount of a noncompete agreement, it is important to work with a tax attorney that can help you organize the information.

Calculating Additional Tax Deductions

When a buyer purchases a business, they are responsible for paying sales tax. In most cases, the buyer simply adds the amount to the buying price. The exact amount of sales tax due will depend on the purchase price and the specific state tax laws. Sales tax on the purchase can be considered a tax deduction.

In many business sales, the seller sticks around for a period of time to help with transitioning the clients. When this occurs, the value of the seller's employment needs to be calculated. This is another tax deduction. Some businesses may choose to use the consulting setup as a form of seller financing. It is important to have a specified end date for the seller's consulting period. Some attorneys recommend a limit of one year.

If you need help with calculating allocation of purchase price to noncompete, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.