Question

On April 18, 2019, Petros buys all the assets of Brigid’s Muffler Shop. Included in the purchase price of $279,000 is a payment of $21,700 to Brigid not to open a competing shop in the state for a period of 5 years.

Brigid’s assets at the date of sale are as follows:

Asset Adjusted basis Fair Market Value Inventory $8,300, $11,600

Equipment 3,500, 28,700

Building 79,500, 118,400

Patent 700, 12,600

Land 4,700, 10,500

The patent is on a special muffler that Brigid developed and patented 5 years ago. Petros would like to know the maximum amount of the deduction he will be allowed on the purchase of Brigid’s assets for 2019. Refer to the MACRS Depreciation Tables to answer the following question.

Note: Do not round any division. Round other computations to the nearest whole dollar. Assume the equipment has a MACRS recovery period of 7 years and that the full election expense is taken in the year of acquisition. The maximum amount of the deduction Petros will be allowed on the purchase of Brigid's assets for 2019 is $ .

Answer 1

Petros paid $279,000 for assets worth $203,500 (including the $21,700 covenant not to compete).

Because he paid more than the fair market value of the identifiable assets, the $75,500 excess is goodwill and is amortized over 15 years. The basis of the identifiable assets is equal to their fair market value. The inventory is not depreciable. The store equipment is 7 years MACRS property & is eligible for expensing under section 179. The building is 39 years MACRS real property. Because the patent is purchased with the other business assets, it must be amortized over 15 years even though the remaining useful life is only 12 years. The covenant not to compare is an intangible asset & must be amortized over the 15 years statutory period. All amortization periods begin on the date of purchase. Because Petros bought the assets after the middle of April, he is allowed only 8 months (May through December) of amortization on the intangible assets in 2019. Its maximum allowable cost-recovery deduction on the asset for 2019 are as follows:

* Store Equipment:

Election to expense $28,700
Depreciable Basis ( $28,700 - $28,700) = $ 0

* Building:

Depreciable Basis $118,400
1st-year depreciation (Table A10 -9) 1.819% = $2,154

* Amortization:

Goodwill ($75,500 / 15 ) x (8/12) = $3,356
Patent ($12,600 /15 ) x (8/12) = $560
Covenant not to compete ($21,700 / 15) x (8/12) = $964

Total 2019 Depreciation & Amortization Deduction = $35,734