What does allocation of purchase price mean, and how does it affect a seller versus a buyer?

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Today's topic: What does allocation of purchase price mean, and how does it affect a seller versus a buyer?

Allocation of purchase price is the method of assigning the sale price of the dental practice, to the assets being sold, for the purpose of determining the taxes owed by the seller, and reported to the IRS. The mutually agreed upon allocation will have different tax implications to a seller, versus a buyer.

For the seller, the allocated categories will determine whether the asset is taxed at capital gains tax rates, or ordinary income tax rates. By properly allocating the purchase price, the seller can potentially minimize their tax liability from the sale.

On the buyer side, the allocation of purchase price determines the basis of the acquired assets for the buyer. This, in turn, affects the depreciation or amortization deductions that the buyer can claim, over the useful life of the assets, which varies by category. A buyer will be able to deduct 100% of the allocated amount, the only question is, how quickly.

It's important to note that the allocation of purchase price should be agreed upon, by both the buyer and the seller, and should be supported by a detailed analysis and documentation.

It is advisable for both parties to consult with accounting and tax professionals, to ensure compliance with applicable laws and regulations, and to optimize the tax and financial implications of the transaction.

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