Discussion:Accounting for purchase of new business

[Inst. 8594]

Kevin did what I call 'fat fingered it'

TexCPA

Have a great weekend kevin

Hope the links help Cynthia

See the instructions under 'who must file'

Generally, both the purchaser and seller must file Form 8594 and attach it to their income tax returns (Forms 1040, 1041, 1065, 1120, 1120S, etc.) when there is a transfer of a group of assets that make up a trade or business (defined below) and the purchaser's basis in such assets is determined wholly by the amount paid for the assets. This applies whether the group of assets constitutes a trade or business in the hands of the seller, the purchaser, or both.

TexCPA

I know the advice is always to buy assets to (1) get a step-up in basis, and (2) avoid the purchase of liabilities.

But sometimes, there are no assests to acquire, other than the Seller's developed goodwill, and the business may not be a liability generator.

Sometimes it is helpful to just acquire the S Corp stock for the continuity of the business and its contracts.

Getting a 15 year amortization and tax deduction for the goodwill purchased in acquiring the S Corp stock would be helpful, and would seem appropriate in the circumstances.

Please advise. Thank you.

[Asset Sale vs Stock Sale]

Although JR1 has been helpful in your link, I still can't understand it all, or get what I consider to be a definitive answer - Is what I hear refer to as a Section 338 election possible in a S Corp stock acquisition? - I think the Buyer would like to buy the stock (For business contract continuity purposes) - The Seller is indifferent (Capital gains all the way around for the Seller) - The Buyer would like to get the 15 year tax deduction on the goodwill - Is there a way to accomplish that in a S Corp stock acquistion, through what I hear referred to as a Section 338 election? Or does a Section 338 election not apply to S Corp stock acquisitions?

I guess I have to consult a tax attorney, or CPA (of which, I used to be one, but never tax)

Any advice appreciated. Thank you.

Thanks for your help

Steve

this is what he bought (debits)

this is how he paid for it (credits)

but hey, I'm not a CPA, maybe it's more complicated than that.

Steve

Steve

If you are talking GAAP accounting for the purchase of a business then the actual accounting is more complex than you seem to be following and the correct answer as to what you debit and credit and for how much depends on when the transaction occurred. Either way the correct answer can be found in SFAS 141 or SFAS 141R depending on the date. And no to the debit expense credit AP for payables purchased. Acquisitions can get rather complex and given the level of judgement (determining fair values) you can quickly lose your independence if you aren't careful.

David

Thank you for the SFAS 141 & 141R references. I'll be sure to refer to them when I once again disagree with my boss. It's nice to know that three other people agree with me about not debiting expenses and crediting the accounts payable.

Steve

If your client indeed purchased a business, as defined in the standards, then the client (or a valuation specialist - use judgement regarding significance) will need to determine the fair value of assets acquired. Inventory should be easy but the trademark may be more difficult. Additionally, I would expect that there are likely other assets such as a trade name, customer lists, non-compete agreements etc that should be valued. Should the determined fair value of these assets be less than the purchase price the remainder is goodwill(purchase price = cash or loan + liabilities assumed - if under 141 then you add in acquisition related costs). Should the fair values exceed the purchase price then under 141R you show a gain (stupid but I didn't write the rule) and under 141 you would allocate the 'negative goodwill' to the assets acquired in the method prescribed in the standard. The trick on independence is if you determine the fair values then you likely are no longer independent. That, however, may not be relevant if you are not performing compilation, review or audit services.