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Asset Purchase Video by Denver Business Attorney

When a business is purchased or sold, the acquisition could be through an asset purchase agreement.  Under an asset purchase agreement, the actual assets of the business are purchased.  This could include the inventory, accounts receivable, furniture, equipment, fixtures and intangible assets such as copyright or trademark rights, or patent rights & licenses.  An asset purchase also has tax implications to both the seller and purchaser, which you may want to discuss with your business attorney and/or tax attorney.

The video below has been prepared by a business attorney and tax attorney from The McGuire Law Firm.  If you are considering selling your business or buying  a business, consult with a business attorney or tax attorney regarding your specific issues.

The McGuire Law Firm provides a free consultation for all potential clients.

Classes of Assets Regarding the Residual Method

In previous articles the Residual Method has been discussed in regards to allocating the consideration paid for a business.  As you may recall, the residual method requires the consideration paid to be allocated amongst classes of assets in a particular order.  The article below has been prepared by a tax attorney at The McGuire Law Firm to provide information regarding the classes of assets that would apply to the residual method.  Please remember that the information below is for informational purposes and it is recommended that you discuss any business transaction with your business attorney and/or tax attorney.

Below are a list of the classes of assets and definitions of such classes for a deemed asset acquisition or an actual asset acquisition.  With the exception of an asset within Class VII, the amount that is allocated to an asset, may not exceed the fair market value of the asset as of the purchase date of the asset.  Furthermore, amounts allocated to an asset can be subject to limits under the IRS or other tax law principles.

 

–          Class I: Cash & general deposit accounts

–          Class II: CODs, US Government Securities, foreign currency, securities (stock)

–          Class III: Debt instruments, accounts receivable

–          Class IV: Property of a kind that would be included within inventory

–          Class V: All assets that would not be included within the other classes

–          Class VI: IRC Section 197 intangibles apart from goodwill and going concern

–          Class VII: Goodwill and going concern

It is important to remember that if an asset could be included within multiple classes, the proper classification would be the lowest of all classes of which the asset could be included.  For example, if an asset could be included in Class II or Class III, you would allocate the asset, or consideration paid for the asset in Class II.

For example, assume the company J Cubed sells its assets for $50,000.  J Cubed sold $20,000 in deposit accounts and inventory with a fair market value of $15,000.  Thus, of the $50,000 paid for J Cubed assets, $20,000 would be allocated to general deposit accounts, $15,000 to inventory (Class IV) and the remaining $15,000 to goodwill and going concern.

When the seller and buyer enter into the asset purchase agreement, the parties can draft the asset purchase agreement allocating the consideration to the assets.  This agreement will be binding on the parties (both buyer and seller) unless the allocation of the consideration is challenged by the Internal Revenue Service, and it is determined that the allocation within the agreement is improper.

You can speak with a Denver tax attorney or Denver business attorney at The McGuire Law Firm regarding the tax and transaction issues related to the sale or purchase of a business.  Contact The McGuire Law Firm and schedule a free consultation with a tax attorney in Denver Colorado.  The McGuire Law Firm has offices in Denver, Colorado and Golden, Colorado for your convenience.

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Allocation of Purchase Price Paid for a Business

How is the purchase price or monies paid for a business allocated?  When a business owner sells their business for a lump sum amount, the sale is considered a sale of each individual business asset as opposed to one single asset.  Of course, this would not necessarily apply if the exchange or transfer was considered a nontaxable exchange.  The article below has been prepared by a Denver tax attorney at The McGuire Law Firm to provide additional information regarding the allocation of consideration that is paid for a business.  Please remember to discuss your specific facts and circumstances with your tax attorney and/or business attorney.  You can contact The McGuire Law Firm to speak with tax attorney in Denver.

As stated above, the sale of a business for a lump sum will be treated as the sale of each individual asset.  The residual method must be used by both the buyer and the seller in allocating the consideration paid.  The residual method will determine the gain or loss from the transfer of each asset, as well as how much of the consideration paid is allocated to goodwill and other intangible property.  The buyer’s basis in the business assets purchased will also be determined through this method, and the buyer’s consideration is the cost of the assets that are acquired through the transaction.  The seller’s consideration will be the amount realized from the sale of the assets.  The amount realized would be the cash (money) received and the fair market value of any property received.

Thus, what is the residual method that will be used to determine the above issues?  The residual method is the method used whenever a group of assets is transferred whereby the group of assets constitutes a trade or business, and the buyer’s basis is determined solely by the amount that was paid for the assets.  The method applies to both direct and indirect asset transfers such as the sale of a business, or the sale of a partnership interest where the buyer’s basis of such interest is adjusted for amounts paid under Internal Revenue Code Section 743(b).  743(b) would apply if the partnership has made a Section 754 election.  The residual method provides that consideration must first reduce (or be applied to) Class 1 assets.  Thereafter, consideration is applied to Class II though VII assets.  These classes of assets have been discussed in previous articles.  Class I is cash and general deposit accounts and Class VII is goodwill and going concern.  A group of assets will constitute a trade or business if going concern or goodwill could attach to them or, the use of the applicable assets would constitute an active trade or business under Internal Revenue Code Section 355.  Thus, once a group of assets is determined to constitute a trade or business, the residual method can be viewed as a hierarchy of the application of the consideration paid for the purchase of a business into separate classes, such classes being Class I through Class VII.

If you have questions regarding how the sale of your business or the purchase of a business will be taxed, speak with a Denver tax attorney at The McGuire Law Firm.  The purchase or sale of a business involves many tax related issues that should be discussed with a tax attorney or a business attorney.  Schedule a free consultation with a tax attorney in Denver by calling 720-833-7705.

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Cash for Assets Business Acquisition

In previous articles a business attorney from The McGuire Law Firm has discussed certain acquisitions between corporations.  The article below will discuss an acquisition known as a cash for assets acquisition.

The first step of a cash for assets acquisition, Corporation 1 would pay Corporation 2 cash consideration of the assets of Corporation 2.  Corporation 1 could decide to accept the liabilities of Corporation 2, and such acceptance would lower the purchase price.  Please note, Corporation 1 does not have to accept the liabilities of Corporation 2 in this type of asset acquisition though. No change would be necessary in the corporation documents of Corporation 1 or Corporation 2 and no change would need to occur in the outstanding shares of either corporation as well.  After the purchase, and as may be commonly seen, Corporation 2 could dissolve after the sale of the corporate assets.  If Corporation 2 did dissolve, the corporate charter would be cancelled and the shares extinguished.  After Corporation 2 satisfied all remaining liabilities, the remaining cash would be distributed to the shareholders of Corporation 2 in a liquidating distribution.  The dissolution and liquidation of Corporation 2 would not impact the shareholders of Corporation 1.

If Corporation 2 did not dissolve and distribute the cash to the corporate shareholders, Corporation 2 would reinvest the cash in operating assets or for corporate operations.  If Corporation 2 reinvested this cash in passive assets such as stocks or bonds, it is important to know that the Internal Revenue Code could deem Corporation 2 a Personal Holding Company and such designation may not have the most favorable tax treatment.  Thus, from a practical point of view, a corporation in Corporation 2’s shoes, is likely to reinvest in business assets to produce income, or dissolve and distribute the monies to the shareholders.

The cash for assets acquisition differs from a stock swap merger in a couple of ways.  First, the shareholders of Corporation 1 shareholders do not vote in the asset acquisition.  Second, the post transaction of the Corporation 2 shareholders is different as in the cash acquisition the shareholders will be cashed out as opposed to holding shares in the survivor corporation.  Third, Corporation 2’s pre-transaction liabilities may remain with Corporation 2 depending upon the terms of the transaction.  Additionally, a stock swap merger, also known as an A Reorganization is typically a tax free transaction, whereas the cash for assets acquisition is likely to be a taxable transaction.

You can speak with a Denver business attorney at The McGuire Law Firm if you have questions regarding a business transaction and/or the tax implications of a business transaction.

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Asset Sale Discussed by Denver Business Attorney

Generally speaking when one business buys or acquires another business the transaction can be either an asset sale or a stock sale.  There are different tax implications, liability matters and other issues depending upon how the transaction is set up.  The video below has been prepared by a Denver business attorney at The McGuire Law Firm to discuss general matters relating to an asset sale.  Please remember that the information provided in the video below is for informational purposes.  You should always contact your business attorney and/or tax attorney to discuss the sale or purchase of any business assets or the stock of a corporation.

If you feel the need to speak with a business attorney in Denver, please contact The McGuire Law Firm to schedule a consultation.

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