Barber Purchasing Established Barber Shop

[Yardley CPA]

Schedule C barber currently rents a one chair barber shop.  He has an opportunity to "purchase" an established shop since the owner is looking to scale back and only cut hair four days a week.  I guess he is really purchasing the name of the shop and will then hire the current owner as an employee until such time as the current owner completely retires.  The current owner rents the location and is not the owner of the building.

 

The purchase price will be determined once the financials are reviewed and they agree upon a price.  I have little experience in the purchase of an established business.  How would the purchase be handled?  Is the amount paid expensed or amortized?  Is sales tax involved on the purchase price?

Any info/guidance would be greatly appreciated.

[Lee B]

See discussion beginning October 7th, "Cosmotologist Chair Rental" which covers most of the issues.

[kcjenkins]

The purchase price will be determined once the financials are reviewed and they agree upon a price.  I have little experience in the purchase of an established business.  How would the purchase be handled?  Is the amount paid expensed or amortized?  Is sales tax involved on the purchase price?

 

Any info/guidance would be greatly appreciated.

No sales tax, but I STRONGLY recommend that you provide them a Form 8594. to help them arrive at the price, and the allocation.  Here is what the IRS says about it.

 

Allocation of consideration paid for a business.   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. It also determines the buyer's basis in the business assets.

 

Consideration.   The buyer's consideration is the cost of the assets acquired. The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets.

 

Residual method.   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b ) of the Internal Revenue Code. Section 743(b ) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code.

 

A group of assets constitutes a trade or business if either of the following applies.

 

Goodwill or going concern value could, under any circumstances, attach to them.

 

The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code.

 

  The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). The consideration remaining after this reduction must be allocated among the various business assets in a certain order. See Classes of assets next for the complete order.

 

Classes of assets.   The following definitions are the classifications for deemed or actual asset acquisitions. Allocate the consideration among the assets in the following order. The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law.

 

Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit).

 

Class II assets are certificates of deposit, U.S. Government securities, foreign currency, and actively traded personal property, including stock and securities.

 

Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. However, see section 1.338-6(b )(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property.

 

Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business.

 

Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets.

Note. Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets.

 

Class VI assets are section 197 intangibles (other than goodwill and going concern value).

 

Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible).

 

  If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. For example, if an asset is described in both Class II and Class IV, choose Class II.

Example.

 

The total paid in the sale of the assets of Company SKB is $21,000. No cash or deposit accounts or similar accounts were sold. The company's U.S. Government securities sold had a fair market value of $3,200. The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U.S. Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value.

 

Agreement.   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. This agreement is binding on both parties unless the IRS determines the amounts are not appropriate.

 

Reporting requirement.   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. See the Instructions for Form 8594.

[Uncle Sam]

Why are you asking about tax advice here - for a barber?

I thought they were the most proclaimed best tax advisers of us all.

[mcb39]

Why are you asking about tax advice here - for a barber?

I thought they were the most proclaimed best tax advisers of us all.

 

Well, my cosmetologist certainly isn't.  She relies on me for every little thing.  Some days drives me nuts, but she does a good job on my hair.  (I pay her; she pays me; agreed on up front.)

[Abby Normal]

The purchase price must be allocated to tangible and intangible assets. See form 8594.

 

Edit: Yes, your state probably has a "bulk sales" tax law. Best if the buyer pays it so you know it actually gets paid.