The fact that an expense would not have been incurred but for the transaction is relevant, but it is not determinative of whether it was incurred to facilitate a transaction. Whether an amount is incurred “in the process of investigating or pursuing the transaction” is determined based on all of the facts and circumstances. Examples of Facilitative ExpensesĪn amount is paid to “facilitate” a purchase and sale transaction if it is incurred in the process of investigating or otherwise pursuing the transaction. Under regulations promulgated by the IRS, a purchaser must generally capitalize any amounts incurred to “facilitate” the acquisition of a business from a target company or the acquisition of ownership interests from the target’s owners a similar rule applies as to costs incurred by the target or its owners to facilitate the sale. Where the costs must be capitalized (i.e., added to the basis of the acquired property), they may reduce the amount of capital gain realized by the seller on the sale, whereas, in the case of the buyer, they may be recovered over the applicable recovery periods for the assets acquired (up to 39 years, in the case of nonresidential real property), thereby making the deal more expensive. Where these costs may be deducted, they generate an immediate tax benefit for the party that incurred them by offsetting the party’s operating income, thereby reducing the economic cost of the transaction. I am referring to the tax treatment of the various costs that are incurred by the buyer and the seller in investigating the acquisition or disposition of a business, in conducting the associated due diligence, in preparing the necessary purchase and sale agreements and related documents and, then, in completing the transaction. There is another element in every transaction, however, that needs to be considered in determining the tax consequences of the purchase and sale, but that is often overlooked until after the transaction has been completed and the parties are preparing the tax returns on which the tax consequences of the transaction are to be reported. An allocation of consideration to the goodwill of the business, for example, will generate capital gain for the seller, and will be recoverable by the buyer over a 15-year amortization period an allocation to the tangible personal property used in the business may generate significant ordinary income for the seller (in the form of depreciation recapture), though it will be depreciable by the buyer over a relatively shorter period. In most cases, these “truths” are only considered in the context of allocating the consideration paid and received for the purchase and sale of a business among the assets comprising the business. It is a basic tax principle that the more a seller pays in taxes on the sale of its business, the lower will be the economic benefit realized on the sale similarly, the more slowly that a buyer recovers the costs it incurs in acquiring a business, the lower will be the return on its investment.
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