Dealers deciding to take advantage of the active merger and acquisition market should first be aware of the income tax effect of a purchase or sale. In this article, the tax treatment of items in a buy/sell will be explained to highlight the tax implications that can impact buyers and sellers.
| Items | Buyer | Seller |
| Franchise Value, “Blue Sky,” Goodwill | Amortized over 15 years straight line | Capital gain |
| Machine and Shop Equipment, Furniture and Fixtures | 5 year accelerated depreciation, section 179 election to expense available | Ordinary income |
| Inventory | Capitalization and deducted as sold | Ordinary income and LIFO reserve recaptured as income |
| Consulting Agreement | Deducted over term of contract | Ordinary income in year paid |
Real Estate:
|
No deductionDepreciated over 5, 7 and 15 years on accelerated basis, and 39.5 year straight line | Capital gainCapital gain |
It is important to obtain a cost segregation study when purchasing dealership real estate, with the goal of allocating items to shorter useful lives.
The breakdown of each category should be outlined in the Letter of Intent and the Purchase and Sale Agreement to avoid unnecessary time delays and negotiations. I have seen many deals delayed and even broken off when the asset allocations were not determined at the outset of the transaction.
Note that both buyer and seller must file IRS Form 8594 in the year of the sale and identify asset categories as designated in the Purchase and Sale Agreement.
If you have any questions regarding this article, please contact Paul McGovern at PMcGovern@DowneyCoCPA.com or at 800.849.6022.
