Purchased a small business in 2022

[adrianojelks]

My business is a sole proprietorship. I purchased a 2nd small business of a similar nature that I run under my original sole proprietorship. Probably 1/3 of the cost of the 2nd business purchase was for materials, intellectual property and furniture and fixtures. How should I address this in my 2022 taxes?

[marctu]

@adrianojelks. thank you for the question.  You'll deal with this on SCH C as a part of your 1040 personal tax return. Begin under the Business tab in the Business Income & Expenses (SCH C) section and work it through.  Your purchase price will be dealt with in the Business Assets section.

Any physical assets included with your purchase are entered there and will be depreciated over time.  For the most part, business assets are depreciated over 39 years. But there are some types/classes of business assets that depreciate faster over a shorter period of time.  This would be the 1/3.  

Non-physical assets you paid for, such as good will or customer lists for example are not capitalized and depreciated over time.  Instead, they are amortized and deducted over time. An amortized asset is spread out over 15 years, and if you have the business income in the first year, you can deduct a maximum of $5K for your amortized assets in that first year if certain specific criteria are met and satisfied.  So 2/3 would be goodwill.  

All the best,

Marc T.

TurboTax Live Select Time Tax Expert

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[rschule1]

Hi There:

The new business will be an exercise of purchase price allocation of the assets purchased. If not specifically specified in the purchase contract then you should fairly allocate the purchase price to the assets purchased:

Materials will be written off as a component of cost of sales.  

Intellectual property should be amortized over useful life of the property. 

Furniture & Equipment will typically be depreciated over seven years.