Purchase price allocation

Definition

How an asset sale's price is split across asset classes for the IRS.

Why It Matters

The split sets your depreciation and amortization schedule and the seller's tax bill at the same time, which makes it a negotiation rather than paperwork. What you want and what the seller wants point in opposite directions: dollars in the equipment classes write off faster for you, dollars in goodwill are taxed more gently for them. A covenant not to compete is on goodwill's own fifteen-year clock, so it buys you no speed, and it is taxed to the seller as ordinary income, which is why both sides usually prefer the goodwill line. Agree the allocation while price is still being discussed, because raising it in closing week means reopening a deal both sides think is done. Both sides report the agreed split to the IRS on Form 8594, and mismatched filings invite questions neither side wants.

In numbers: On a $4M asset deal, allocating $1.6M to equipment (depreciated over years) versus goodwill (amortized over 15) changes your near-term tax deductions and the seller's gain treatment; the two sides pull opposite ways, which is why it is negotiated.