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With the new tax bill now official, companies making acquisitions that are asset purchases (or treated as asset acquisitions for tax purposes) will want to pay close attention to the agreed-upon purchase price allocation. Given the ability to expense acquired personal property assets immediately, acquirers could enjoy a significant tax benefit by maximising the amount of the purchase price that is allocated to non-real property assets. Alvarez and Marsal, Taxand USA, explores.
The Old Environment
The ability to step-up assets to fair market value (FMV) as part of a taxable acquisition has been incorporated by acquirers for quite some time. A transaction involving the acquisition of assets, or treated as an asset acquisition through, for example, a Section 338(h)(10) election, provides the acquirer with the ability to depreciate the acquired tangible assets based on their respective FMVs. For capital-intensive targets, this often provides a significant financial benefit for acquirers, given that the FMV of an asset is typically higher than its tax basis. However, it is worth noting that a step-up in asset value is often a contentious point for sellers, as it can result in more tax to the seller due to a shift in tax character and/or recapture. Keep this important point in mind as we discuss the effect of the new tax law.
Discover more: The new tax bill – acquisition considerations
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A cost segregation study should be on the mind of anyone who is considering an acquisition of a company with extensive tangible property assets. What immediate action should be undertaken by acquirers in a taxable asset transaction? The answer is to conduct a cost segregation and valuation of personal and real property assets — at the time of the transaction to ensure the allocation of value is included in the purchase agreement — to allocate as much value as possible to non-real property assets.