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buying a business, tax and depreciation
Old 11-02-2007, 07:07 AM   #1
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buying a business, tax and depreciation

These are questions which I have addressed with our cpa, but I figured I would also run it by the experts on this board, as well, for some second impressions. A couple of partners and I entered into agreement to buy a service-oriented business (LLC) with great cash flow from another gentleman a couple of years ago. We decided on an installment-oriented buyout spread across a number of years. The gentleman we were buying from wanted to structure the buyout so that the payments were, by and large considered capital gains, netting him a lower tax bill than he had when business income was taxed as income.
The first year of payments consisted mainly of paying off his 'capital account' which I understand is defined as money a business 'owes' a member when cash is being re-invested into the business. These payments were, I believe, taxed from his perspective as ordinary income. The next year, for the most part, payments made to him were considered capital gains from his perspective, and taxed for him as such. The problem for the new owners (us), is that the payments are being depreciated tax-wise over a 15 year schedule, which leads us to have to use lots of cash to simply pay the taxes, which seem inflated from our perspective since the payments to the previous owner are 'written off' over a longer period than they are being made.
The question is, am I missing something here? Is this 15 year depreciation sched normal, or is it something arbitrarily assigned in our case? Does the deduction for the depreciation 'accelerate' as time approached the 15 year point?

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Old 11-02-2007, 08:29 AM   #2
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I'm by no means an expert. In my situation, there were two depreciation schedules. The value of equipment and inventory was depreciated at five years for the most part, I believe. The purchase amount above that was considered to be customer lists and good will, and could only be depreciated over 15 years. Our purchase was structured as an asset purchase, not a stock purchase, and it was a single payment at closing. So I'm not sure if anything would differ in our cases.
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