This nugget is the second in a series discussing real estate issues related to the purchase of a business that uses real estate owned by the seller or its owner. This nugget will discuss a potentially valuable tax planning tool.
Suppose that the owner of the seller also owns the real estate used by the business. The negotiations for the purchase of the business will include negotiations for a new lease. As discussed in a previous nugget, the purchase price for the business must be allocated among the assets of the business being purchased. The allocation has significant tax consequences to the purchaser and the seller. Separate from the allocation of the purchase price among the business assets, there is an opportunity to allocate the total amount to be paid to the seller between the business assets and the lease, meaning rent. The tax benefit to the purchaser is that any amounts paid as rent are deductible as an ordinary expense. Care must be taken to assure that amounts allocated to the lease as rent payments will pass muster if tested against what a fair market rent would be. The lesson here, however, is that before thinking about how the purchase price should be allocated among the business assets, explore whether it would be reasonable to allocate part of the monies to be paid to the lease.
ABOUT GLENN D. SOLOMON
Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress
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