When selling a business, it’s important to allocate a purchase price for the business’s assets. Allocating a purchase price occurs with both stock sales and non-stock sales. In most cases, selling a business either involves selling the business’s stock or selling the assets of the corporation.

Can A S corporation elect to allocate passthrough items?

An S corporation can elect under IRC Section 1377 to allocate passthrough items based on specific accounting when a shareholder disposes of his entire interest in the S corporation. Under this code section, a timely filed election can be made to treat the tax year as if it consisted of two tax years.

Are there allocation issues in a business sale?

This discussion considers allocation issues encountered in the vast majority of business sales, those where the buyer is taking over all the assets of the business but not the entity itself.

How is a sale of an S corporation taxed?

From the seller’s income tax perspective, the same amount of total gain will be recognized by the S corporation shareholders in a sale of all of the S corporation outstanding equity as in a sale of all of the S corporation assets (followed by a complete liquidation of the S corporation).

When to sell a business or asset sale?

The owners of small businesses and other privately held companies will typically use asset sales when selling their businesses. Since private companies don’t offer public stock options, the only true value they possess is through their capital assets.

How are assets treated in an asset sale?

Asset sale. In an asset sale, the Company is treated as selling, and the purchaser is treated as buying, the various Company assets separately for allocable portions of the aggregate purchase price.

How does an agreement of purchase and sale of business assets work?

Agreement of Purchase and Sale of Business Assets Page 2 of 5 b) For the stock in trade, its direct cost to the Vendor; c) For the parts and supplies, their direct cost to the Vendor; d) For the goodwill – [AMOUNT]; e) For all other assets agreed to be bought and sold.