Global merger and acquisition (M&A) activity has reached new highs in 2021, according to Refinitiv, a provider of financial data. It is important to familiarize yourself with the rules and process of reporting M&A activity.
It is very important that all parties involved to report to the IRS and state agencies the same way.
Low interest rates is one of the main factors that caused this uptick in M&A activity. Refinitiv has reported that 2021 is set to be the biggest in M&A history, with the United States accounting for $2.14 trillion worth of transactions already this year.
Are you buying or selling a business? If you are buying or selling business assets, both the buyer and the seller must generally report to the IRS the purchase price allocations. You increase your chances of being audited if both parties do not report to the IRS and state agencies in the same way.
If a sale involves business assets (as opposed to stock or ownership interests), the buyer and the seller must generally report to the IRS the purchase price allocations that both use. This is done by attaching IRS Form 8594, “Asset Acquisition Statement,” to each of their respective federal income tax returns for the tax year that includes the transaction.
Here’s what must be reported
If you buy business assets in an M&A transaction, you must allocate the total purchase price to the specific assets that are acquired. The amount allocated to each asset then becomes its initial tax basis. For depreciable and amortizable assets, the initial tax basis of each asset determines the depreciation and amortization deductions for that asset after the acquisition. Depreciable and amortizable assets include:
- Equipment,
- Buildings and improvements,
- Software,
- Furniture, fixtures and
- Intangibles (including customer lists, licenses, patents, copyrights and goodwill).
In addition to reporting the items above, you must also disclose on Form 8594 whether the parties entered into a noncompete agreement, management contract or similar agreement, as well as the monetary consideration paid under it.
What the IRS might examine
The IRS may inspect the forms that are filed to see if the buyer and the seller use different allocations. If the tax agency finds that different allocations are used, auditors may dig deeper and the examination could expand beyond the transaction. So, it’s best to ensure that both parties use the same allocations. Consider including this requirement in your asset purchase agreement at the time of the sale.
Contact your Rudler, PSC advisor for help and advice navigating the proper completion of IRS forms at 859-331-1717. The tax implications of buying or selling a business are complex. Rudler has dedicated tax teams that can help you with complicated rules and regulations. Price allocations are important because they affect future tax benefits. Both the buyer and the seller need to report them to the IRS in an identical way to avoid unwanted attention. To lock in the best results after an acquisition, consult with your Rudler advisor before finalizing any transaction.
RUDLER, PSC CPAs and Business Advisors
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