ALBUQUERQUE, N.M. — Q: I am selling my business to a larger company. We agreed on a price and I am supposed to get the funds shortly, but the agreement has a clause that we will report the transaction consistently on our tax returns. I have been told this means that we need to agree how the purchase price will be spread among the business assets. This agreement must be finalized before we file our respective 2019 tax returns. My question is whether this is a reasonable clause and what would happen if we did not agree.
The clause that you describe is one that I have seen in many deals, most often when the buyer is a private equity firm that would meet your description of a larger company. I don’t like the clause as you describe it but, again, they are common and I have had several clients who have agreed to these clauses.
How these agreements work out are important, both for the buyer and the seller. And the parties usually have competing interests in how the allocation will be done.
The law requires that both the buyer and the seller report how the total price is allocated among various classes of assets. This is reported to the IRS on a Form 8594 that is attached to the tax return for the year of the purchase (buyer’s return) and sale (seller’s return).