In the vast majority of transactions we handle (Asset Sales), the IRS requires both the Buyer and the Seller to file Form 8594. This form tells the government exactly what assets were purchased.
Crucially, both forms must match. If you report one set of numbers and the buyer reports another, you trigger an audit.
This creates a “Zero-Sum Game” negotiation that often happens right before closing.
The Conflict: Depreciation Recapture vs. Capital Gains
The Buyer’s Goal:
They want to allocate as much of the purchase price as possible to hard assets (Equipment, Fleet, FF&E) and a Non-Compete Agreement.
- Why? They can depreciate these assets quickly (Section 179) to lower their tax bill immediately.
The Seller’s Goal:
You want to allocate as much of the purchase price as possible to Goodwill (the reputation and cash flow of the business).
- Why? Goodwill is taxed at the Capital Gains rate (typically ~20%).
- The Trap: If you allocate money to Equipment, you often face “Depreciation Recapture.” This means if you already wrote off those assets on your taxes years ago, selling them now counts as Ordinary Income, taxed at your highest personal rate (37%+).
The Math: A $5 Million Example
Let’s assume we are selling a heavy-service business or manufacturing plant for $5,000,000. The “Swing Vote” in the negotiation is how we categorize $2,000,000 worth of heavy machinery and fleet vehicles.
- Scenario A (Buyer Wins – Asset Heavy):
- The $2M is allocated to Equipment.
- You pay Ordinary Income Tax (~37%) on that $2M.
- Your Tax Bill: ~$740,000.
- Scenario B (Seller Wins – Goodwill Heavy):
- We negotiate to value the equipment at book value ($500k) and push the remaining $1.5M into Goodwill.
- You pay Capital Gains Tax (~20%) on that $1.5M.
- Your Tax Bill: ~$300,000.
The Result: A difference of $440,000 in your pocket at closing.
The Strategy
Do not leave this discussion for the lawyers to handle the day before closing. We negotiate the Purchase Price Allocation early, often making it part of the Letter of Intent.
We ensure the deal is structured to maximize your Net Proceeds, not just the gross sales price.