Discussion:Buyout expenses
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Discussion Forum Index --> Basic Tax Questions --> Buyout expenses
Discussion Forum Index --> Tax Questions --> Buyout expenses
| 5 January 2008 | |
| In 2007, I purchased a tax practice from a local preparer. I am to pay him a percentage of the income I receive for each client, each year, over 5 years. I was ready to amortize the expense every year, as a sec 197 deduction. Then, after speaking with my very conservative CPA boss, he thought that I should be able to deduct the cost as a current expense. Any opinions on this? | |
TheTinCook (talk|edits) said: | 7 January 2008 |
| What rationale is he basing his position on? Royalties?
What you have here is an installment purchase. It's no different from buying something with note. You don't get to expense it as you pay it. Instead you get to amortize or depreciate depending on the type of assets. | |
| 7 January 2008 | |
| I have never thought of it that way, I think because there is no set contract amount. The way it works is that Client A now comes to me. What ever I charge him for year 2008 (say $100), I pay the previous preparer a percentage of say 25%, or $25. Then in 2009, I do the same thing (charge $110, pay old preparer $27.50). Then in year 2010, client decides not to come back. I owe previous preparer nothing. If the client does come back, then this agreement continues until 2011.
It seems to me like I should depreciate it, but would I start a new 15 year period for every payment I make to the old preparer? That's what it would be if it were a sec 197 item. It's hard to tell if buying a client base, under Sec 197, is for one lump sum payment, or if it applies to situations like this. | |
Rgtaxservice (talk|edits) said: | 7 January 2008 |
| If you've already purchased the practice and these payments are in addition to the purchase costs, couldn't you classify the seller's annual payments as commissions and deduct them as a current expense? | |
TheTinCook (talk|edits) said: | 7 January 2008 |
| "If you've already purchased the practice and these payments are in addition to the purchase costs, couldn't you classify the seller's annual payments as commissions and deduct them as a current expense?"
That would imply that some services are being performed by the old owner. | |
Rgtaxservice (talk|edits) said: | 8 January 2008 |
| If the practice was already purchase why would the payments have to imply that a service was performed? It's a commission based on sales.
However, since there was no outright purchase this is an installment sale. Was there a set purchase price or was it just based on sales? | |
TheTinCook (talk|edits) said: | 8 January 2008 |
| What I meant to say is, in order for the payments to be commissions that are currently deductable by kritter, the old owner needs to be providing some kind service other then handing over his book of business. If the old owner is just sitting on the beach at Boca, then it's part of the purchase price, even if the final amount is not fixed. | |
| 8 January 2008 | |
| Aunt Emmy say them payments is referral fees and is deductible. Them fees is based on sales and not on some asset. No capitalization here. Jest expense. Them clients kin take off anytime and you dont owe nothin? Then there aint no capital stake in this deal.
You payin a percentage of what you collect or what he collected when they was his clients? What if them clients git rich and they tax returns is might more pricey? He git a premium? | |
| 9 January 2008 | |
| I am paying the prior owner a percentage of what I collect. I have a maximum amount I can pay the prior owner, per client, based on the owner's last year's income with that client.
Ex. Client A paid the old owner $500 in 2006. I am to pay 20% of whatever income I collect to the old owner, every year, for 5 years, starting in 2007. The maximum amount I pay to the old owner is 20% of $500, or $100 for that year, even if I charge Client A $1000. Now, if Client A has significantly less work, & I charge $100, I pay the owner 20%, or $20. The old owner has no contact with clients, provides no services to me. | |
