Taxes & Entities

Purchase Price Allocation

The schedule at the back of a purchase agreement quietly moves six figures of tax between buyer and seller — learn to read it before you sign it.

  • Advanced
  • 8 min total
  • 13 chapters

What decision this helps you make: How to split an agreed purchase price across the assets being bought, and what to fight for, because the split decides who pays tax and how soon.

What this topic is

When a business changes hands as an asset deal, the tax code refuses to see one purchase at one price. It sees the simultaneous purchase of every asset on the list — cash, receivables, inventory, equipment, a customer list, a non-compete — each with its own tax life. Purchase price allocation is the required exercise of spreading the agreed price across that list, with goodwill absorbing whatever is left.

Why it matters

The price is already settled. The allocation decides how fast the buyer writes it off and at what rate the seller is taxed. Moving a million dollars from goodwill into equipment can be worth six figures to the buyer and cost the seller nearly as much — which is why it gets negotiated, written into the contract, and reported by both sides on the same IRS form.

Who should learn it

Anyone buying or selling a business in an asset deal, plus the advisors, finance leads, and operators who have to live with the resulting depreciation schedule for fifteen years.

What you will understand

  • Why an asset deal is seven separate purchases in the eyes of the tax code
  • How the residual method fills the classes and dumps the remainder into goodwill
  • Why the buyer wants equipment and the seller wants goodwill — with the arithmetic
  • Where the allocation is negotiated, documented, and reported — and what happens when the two sides disagree

Prerequisites

Common misconception

"We agreed on $5 million. The allocation is an accounting chore afterward." It is a second negotiation over real money. The same $5 million, split differently, can change the buyer's first-year deduction by a million dollars and flip a slice of the seller's gain from capital-gain rates to ordinary rates. It belongs in the letter of intent, not in a schedule someone fills in the week before closing.