Appraisal, broker fee paid as part of business purchase

[Tax Prep by Deb]

I have a clients (C Corp) that purchased a business.  He spent money on an appraisal as well as paid a broker a commission.  How would this be entered on the balance sheet?

[BulldogTom]

I think I would call it start up costs (if the amount is not material) and expense it.   If it is a material amount, I would still call it start up costs and amortize them.   I think the most conservative approach would be to call those costs part of the purchase price of the business and increase the basis of the fixed asset items that the cost most closely are tied to (Land, Building, Machinery & Equipment, F&F, Goodwill).

A CPA will probably correct me, I tend to make entries in the balance sheet that make sense for the business owners and sometimes I don't read up on the FASB pronouncements on how to handle some of these items the way the large firms do.

Tom
Longview, TX

[jklcpa]

These fall under § 1.263(a)-5 - Amounts paid or incurred to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. Here's a link to that:  1.263(a)-5(a)(1):

Quote

§ 1.263(a)-5 Amounts paid or incurred to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions.

• (a) General rule. A taxpayer must capitalize an amount paid to facilitate (within the meaning of paragraph (b) of this section) each of the following transactions, without regard to whether the transaction is comprised of a single step or a series of steps carried out as part of a single plan and without regard to whether gain or loss is recognized in the transaction:
• (1) An acquisition of assets that constitute a trade or business (whether the taxpayer is the acquirer in the acquisition or the target of the acquisition).

and the please see 1.263(a)-5(e)(2)(i) in the same linked page above regarding the appraisal that falls within the definition of certain acquisitive transactions that are considered "inherently facilitative", meaning that these appraisal costs must be capitalized no matter when they are incurred and one cannot use the bright-line date tests outlined in 1.263(a)-5(e)(1)(i) and (ii)

[Tax Prep by Deb]

So, forgive me for sounding dumb, (I really think I should have passed on this one, but he is a long time client) because these are capital expenses, are they depreciated and if so for how long?  Everything else is clear to me on the purchase ect... these are the two things that have me stumped!  Never had a client who bought an existing business and feel I am over my head.

[jklcpa]

Allocate the total of the appraisal and broker fee ratably to each of the assets purchased and use the appropriate lives allowed for whatever type of asset it is. Some will be allocated to land that is obviously nondepreciable.

Remember you are also supposed to attach the 8594 to the return, so I would also include a schedule showing those amounts and then the allocation of these additional costs to arrive at the totals of each category. On this reconciling schedule, I'd use a generic label for these additional costs, something like "other acquisition costs capitalized."

[Tax Prep by Deb]

Thank you!