Is this a good allocation of $ for the buyer for tax advantage?
PURCHASE PRICE $475,000.00
Furniture and Equipment $ 110,000.00
Covenant Not to Compete $ 1,000.00
Patient Records $ 179,000.00
Goodwill $ 185,000.00
I would switch patient records and covenant not to compete. It has nothing to do with taxes. I just wouldn’t feel comfortable in a transaction where the covenant not to compete is so low. What happens if it is violated? Is it worth more than $1,000 if you have to sue for it. Whereas, patient records are just paper and x-rays and pertain more to goodwill.
Try and keep the equipment allocation as high as possible for taxes, you should negotiate over this amount.
I agree, though possibly for a different reason.
IF Nevada has a sales tax on furniture and equipment, they may also tax patient records. IF NV has an annual property tax on furniture and equipment, that could also be costly over the years. So please be careful to consider other taxes, and not just income tax.
Here in MD, with that allocation, the buyer would really be getting the short end of the stick when you consider ALL the tax issues, and not just income tax.
What has your tax advisor advised?
As long as there is language stipulating that the allocations are for tax purposes and is not meant to be a damage award, etc. then the amount is irrelevant, however I like to have a slightly higher covenant just so it passes the IRS smell test and therefore usually use an arbitrary figure of $10,000. NV has a peculiar law on sales tax on equipment that has not truly been settled yet. Therefore, to avoid it I would recommend an allocation of a consulting agreement and a supply allocation.
How about this allocation?
Equipment and furnishings $6,000 $50,000
Dental Supplies $1,000 $5,000 (including hand pieces, small tools)
Goodwill $20,000 $21,000 (including patient records)
Covenant Not to Compete $46,883 $10,000
Leasehold Improvements $16,117 $0
Patient Records $20,000
Thanks Tim. Is consulting deductible? Why does it help the seller to minimize the equipment value?
Probably because their tax basis is zero so any allocation will be ordinary income.