According to financial data provider Refinitiv, global merger and acquisition (or M&A) activity is expected to set new records in 2021 in response to low interest rates and other factors.
This year, the United States alone has already accounted for $2.14 trillion worth of transactions.
If you’re in the process of an M&A transaction or are considering buying or selling a business, you need to make sure the transaction is reported to the IRS in the same way by both parties. Failure to do so may increase your risk of being audited.
Generally speaking, the buyer and the seller must report the purchase price allocations that they both use to the IRS if a sale involves business assets, rather than stock or ownership interests. In order to do this, both the buyer and seller need to attach IRS Form 8594, “Asset Acquisition Statement,” to their respective federal income tax returns when they file for the tax year in which the transaction took place.
What you need to report
When business assets are bought through an M&A transaction, the total purchase price must be allocated to those specific acquired assets. Each asset’s initial tax basis will be the amount that was allocated to it.
After the acquisition, the initial tax basis of depreciable and amortizable assets will then determine the depreciation and amortization deductions for those assets. The following are examples of depreciable and amortizable assets:
- Buildings and improvements
- Equipment
- Furniture and fixtures
- Software
- Intangibles such as patents, licenses, customer lists, copyrights, and goodwill
You will need to report the items above on form 8594, in addition to disclosing whether the parties entered into a management contract, noncompete agreement, or other similar agreement, and the monetary consideration paid under such an agreement.
Points of focus for the IRS
The IRS may check to make sure that the buyer and seller use the same allocations by comparing the forms that are filed. If auditors discover that different allocations are used, they may decide to conduct a further examination that goes beyond the transaction itself. As such, you’ll want to make sure that both parties use the same allocations, and it may be worthwhile to make this a requirement of your asset purchase agreement.
Buying or selling a business comes with complex tax implications, and you’ll need to be careful in your reporting to avoid unwanted attention. Before you finalize a sale or purchase, contact us. We can help you ensure the best results after your acquisition.