Allocation of the Purchase Price in Sales Transactions
When buyers and sellers decide how to allocate the purchase price in a sale among the assets being purchased and sold, they are often unaware of the tax implications of that allocation. Scott Glazier published an article discussing methods of allocating the purchase price in the May/June 2019 issue of the Florida Bar Journal. An excerpt is below:
As a transactional lawyer for over 30 years, I have encountered many tax and nontax issues that while extremely important to my client, the client may have no idea how these issues may affect them from a liability or tax standpoint. Thus, many of these issues are left to the experienced counsel to be an advocate for his client’s position even when the client is unaware of the various issues being debated. Some of these issues include topics, such as survival periods of representations and warranties, indemnification issues, including “baskets” and “caps,” knowledge qualifiers and nuances surrounding restrictive covenants. While “best practices” dictate that you send a comprehensive letter to your client explaining the multitude of legal and tax points you have negotiated on their behalf so that if a post-closing issue should arise, the attorney has “covered” himself, in practice, deals do not stand by while you write “CYA” letters. Further, clients are loathe to pay for such things, especially on Main Street deals and smaller middle-market deals.
Many of the issues identified above are hot topics with counsel for the other party and end up being some of the most negotiated issues in a transaction. However, there is another significant tax issue that I have found gets little attention in many transactions and ends up being one of the last items to be completed; that issue being the allocation of the purchase price in transactions in which such an allocation is required pursuant to §1060 of the Internal Revenue Code of 1986, as amended (code). Accordingly, this article explains the what, when, why, and how of purchase price allocations so that you will be aware of these issues and perhaps be a better advocate for your client, even though they may not recognize your valuable contributions (unless you point it out to them). Finally, we will look at the impact of the recently passed Tax Cuts and Jobs Act of 2018 (TCJA).
To find out more, please read the full article at the Florida Bar Journal’s website or contact us to discuss these issues in greater detail and find out how they may affect the purchase or sale of your business.