Question

A taxpayer purchasing a business and seeking to minimize taxable income in the early years of the business by maximizing cost recovery deductions would seek to allocate as much of the consideration from the purchase to which type of asset:

a. real property other than land

b. goodwill

c. covenant not to compete

d. land

e. 5 year depreciable property

Answer 1

Answer : [b] goodwill

with an asset purchase, the most important tax saving opportunity revolves around how you invest/ allocate the total purchase price to specific assets that are acquired.

you have to allocate as much as price :

[a] to the higher taxed ordinary income, which can be converted in to cash, like; inventory and receivables

[b] to the intangible assets that can be amortized over 15 years, like: goodwill , softwares etc.

[c] to the equipments that can be depreciated quickly like; furnitures, machineries etc.

you have to allocate less prices on :

[a] the assets that must be depreciated over long periods

[b] the assets which cannot be depreciated like; land.