Form 8594 allocation

Forum|Forum|5 years ago
February 14, 2021
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I recently retired and sold my dental practice. At the closing the broker allocated the Purchase Price as follows:

Equipment, Furniture/Fixtures, Supplies, Personal Goodwill, Non-Compete/Non-Solicitation Covenants, Accounts Receivables, Consulting Agreement

For each item, I need to determine both whether it is ordinary income (<1 year) or long term capital gain. I also need to decide which "Asset Class" they fall under.

My best guesses are:

Equipment, Furniture/Fixtures = Income, Class V

Supplies = Income, Class V

Personal goodwill = LTCG, Class VII

Non-compete/Non-Solicitation Covenants = Income, Class VI

Accounts Receivables = Income, Class III

Consulting Agreement = LTCG, Class VII

Can anyone verify this or tell me what is correct? I have looked at the instructions every day for more than a week, called the broker, asked a CPA, and tried to contact the IRS, but cannot get a clear, consistent answer.

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M-MTax

Level 15

You may not get a clear answer but there's one thing for sure and that's that your 8594 and the buyer's 8594 must match exactly. So, you need to make sure you're on the same page there in the first place. Most business sales stipulate in the sales and purchase agreements how much of the purchase price is allocated to each asset, inventory, and to goodwill.

Joe dentistAuthor

Level 2

Hi Martin,

Yes, thank you for your answer. I spoke with the buyer yesterday and he told me the name of his CPA. I will go to his CPA as well for advice - that way it will match. The sales contract does list the amounts, I just am not sure about whether the items should be ordinary income or LTCG and I am not sure about the Asset Class. I have seen conflicting things in articles on the web as well.

Thank you again,

Joe

Rick19744

Level 13

Some thoughts on your question:

This is not a difficult area, and a CPA that couldn't help you is one you should avoid anyhow. Unless they just told you that this was not a strong point of their practice.
Keep in mind, that discussing this with the buyer's CPA is like using the same attorney in a divorce. They can really only represent one person. Buyer's and seller's have conflicting goals in these situations.
Your purchase agreement should have spelled out exactly how the purchase price was to be allocated and by each class listed in the form 8594. The agreement should have mirrored what will be reported on the form 8594.
Once you have the purchase price allocated to the correct class, you then determine your gain or loss by subtracting your basis in the items in that respective class. This will drive your ordinary or capital gain.
Question 5 on the form 8594 specifically asks if there is a written and signed allocation
Question 6 on the form 8594 specifically asks about the covenant not to compete and the consulting agreement. Once again, requires specifics.
You need to be careful on the allocated amount of personal goodwill. Technically, this should have been a separate agreement. This is a hot button for the IRS.
You will have ordinary income in the areas of depreciation recapture, supplies (depending on how you accounted for them), and your consulting agreement at a minimum. So these are the areas that the buyer wants to allocate more as these items will be depreciable over shorter lives for the fixed assets.
The other item not discussed is whether you received the full purchase price; other than maybe the consulting component. This can be critical as if you have an installment sale, all depreciation recapture is recognized in the year of sale. This catches some sellers off guard as their initial proceeds may not cover the tax due on the depreciation recapture.
If you get a comfortable feeling from the buyer's CPA, I might recommend that you just have him prepare your tax return.
Your class breakdown looks reasonable, other that I don't believe any personal goodwill should be a part of the business purchase. As "personal" is being used, this should be a separate agreement with a separately determined amount.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.