I am doing a stock purchase of a c-corp. 500,000 first year with 50% of net in 4 following years. Taxes would be pretty hefty so I am looking to reduce my tax liability. How much of the purchase can I allocate to Goodwill and a Covenant not to Compete? Are there any other solutions?

asked 13 Dec '09, 22:05

John%202's gravatar image

John 2
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edited 16 Dec '09, 16:25

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TaxQueries ♦♦
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As a stock purchase of a corporation, the purchase price is not allocable to the "inside basis" of the assets unless a Section 338 election is made which will treat the transaction from the seller's perspective as an asset sale.

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answered 14 Dec '09, 20:52

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Brent Berkman
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There is a very specific and complicated formula by which assets of the company purchased must be allocated by law. The computations are much too extensive to even begin to cover here. I strongly suggest you find someone that is experienced in business value allocation and splitting and have a full evaluation done. You may have quite a bit or maybe very little left to allocate to goodwill, but you can not just do it arbitrarily however you feel like.

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answered 13 Dec '09, 22:12

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AJ
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Yes agreed AJ; and the balance sheet of the corporation and the legal documents will or at least should state what is goodwill and what is a non compete. If you don't have an attorney yet John, I certainly would have legal counsel to set up the sale/purchase to reflect what both parties want to accomplish.

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answered 14 Dec '09, 20:13

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SandySea
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Brent is correct - a stock purchase gives you basis in the corporate stock (outside basis). The basis of the assets of the corporation (inside basis) continues unchanged. You can not start the depreciation of fixed assets over and no goodwill or intangible asset is created. The Section 338 election does get around it but both buyer & seller must be agree. Typically the seller wants a stock sale for tax purposes and the buyer wants an asset purchase. If the deal is not already done you may want to consult your tax advisor regarding how the purchase can be structured to allow you the step up in basis.

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answered 16 Dec '09, 12:35

PStampley's gravatar image

PStampley
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$-0-. It is a stock purchase!!! The price you pay for the stock is your cost basis in that stock. As Brent discussed a Sec 338 election must be done in order to allocate purchase price to the inside basis of corporate assets. After doing a Sec 338 election, I believe you would look to Code Sec 1060 for allocation. In my opinion a better way to handle the purchase would be an asset purchase. Start a new corp, your new corp buys the assets of the target corp. Allocation of purchase price would be done under code sec 1060 to set up new balance sheet. Under this senario, you would start "fresh" not worrying about any hidden liabilities the purchase of stock deal would present.

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answered 16 Dec '09, 16:54

Bill%20Loffredo%20CPA's gravatar image

Bill Loffred...
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I'm with Brent, Bill and Stampley on this one. Good luck getting the seller to agree to a 338 election. The very reason they wanted a stock sale was to get the benefit of long term capital gain tax treatment, its doubtful they will agree to a 338 election which could negatively impact them now.

I am curious as to WHY you did a stock purchase instead of an asset purchase?

I'm also curious about what TAX LIABILITIES you're speaking of?

Thanks for the additional info, John. Unfortunately I think you're stuck if you proceed with a stock sale. If it isn't too late maybe you can get the seller to agree to an asset sale.

A stock purchase not only stings because you can't start depreciation and amortization over, but you will now be accepting responsibility for all of the company's current obligations including any outstanding payroll taxes.

You need to make sure that you're NOT on the hook for these. You should also make sure to have an accountant AND an attorney review everything prior to closing on this.

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answered 05 Jan '10, 01:15

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EAgent
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edited 06 Jan '10, 17:08

I would greatly prefer an asset purchase so I could deduct the entire expense.

I am trying to avoid the TAX LIABILITY of my income (this years) which I will not be able to deduct on the stock purchase.

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answered 05 Jan '10, 20:55

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john
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Another reason that has not been mentioned yet for purchasing the assets and not the stock is that you also purchased the tax history and potential tax liabilities for all open items and years for the corporation, unless there was a hold harmless clause within the purchase agreement. If there are unused net operating losses for the corporations previous years that you were planning on utilizing, the rules for utilizing those as a new stock owner are complicated and you should see an advisor.

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answered 15 Apr '10, 20:31

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Eddie Douglas
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Asked: 13 Dec '09, 22:05

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Last updated: 15 Apr '10, 20:31