Purchase Price Allocation
In most sale transactions there is plenty of debate surrounding the treatment and allocation of the purchase price. Generally (or should I say always) the vendor will aim to minimise the amount of the sale price allocated to stock, plant and equipment or other physical assets and maximise the allocation of goodwill. Conversely, the purchaser will want to maximise the allocation to physical assets, and minimise the allocation to goodwill.
In all cases the amounts used to allocate the sale proceeds must be ‘reasonable’. How do you define reasonable? In most instances fair market value can be considered ‘reasonable’.
The allocation of the purchase price has both federal and state based tax implications. Federally, there are Income and Capital Gains Tax consequences and on a state level, stamp duty considerations.
Different States have different rules and rates. There is no one rate that can be unilaterally applied across all States.
Buyers and sellers should always consult their tax advisors.