Accounting & Bookkeeping & Small Business Forum

[LTB]

I own a small business that will have about 1M in profit this year. I want to acquire a competitor for about 800k. Can I deduct the 800k from the 1M to get a taxable income of 200k for the year. I met with an accountant that said yes, but I'm not sure I trust him. Any advice would be appreciated. Thx.

[dp1903]

Except for qualifying section 179 property which is limited [limits have gone up for 2008], and for certain transaction costs related to the acquisition, I don't see how the remainder of the acquired business's assets can be expensed when purchased. I'm not sure that section 179 applies to acquistions. I haven't been able to find any applicable info at the IRS's website, so I don't know what the actual guidelines are.

However, it doesn't make sense to me that you could deduct the assets of a business you are acquiring, unless they qualify for section 179. Seems to me the assets, liabilities and equity of the acquired business would become part of your business and reported on your balance sheet. I would get a second opinion.

[quote]Increased section 179 limits. The maximum section 179 deduction you can elect for qualified section 179 property you placed in service in 2007 has increased to $125,000 ($160,000 for qualified enterprise zone property and qualified renewal community property). This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $500,000. For qualified section 179 Gulf Opportunity (GO) Zone property, the maximum deduction is higher than the deduction for most section 179 property. See chapter 2 of Publication 946, How to Depreciate Property.[/quote]

[LTB]

Thank you, that was my general thought as well.

[dp1903]

I went through my advanced accounting book last night. When acquiring a business for financial accounting purposes [ not tax purposes] the assets, and liabilities of the company being acquired are combined with those of the acquiring company. The assets and liabilities of the company being acquired are recorded at fair value. There also may be goodwill involved. Accounting, legal, and finder's fees in connection with the acquisition are recognized as an investment cost, i.e. goodwill. Any other out-of-pocket costs are recorded as a reduction in equity of the combined entity.

http://72.3.243.42/st/summary/stsum141r.shtml

I would anticipate that the IRS guidelines closely follow, for the most part, the same procedure, but I don't know where to find those guidelines.