What is purchase price allocation and why is it important?

Purchase price allocation is a key process in a sale, and it involves assigning the total purchase price to the individual assets being sold. This affects your tax liability as the seller and the buyer's tax basis in the acquired assets. Generally, sellers prefer to allocate as much as possible to capital gain assets and intangibles, while buyers often want to allocate to depreciable assets. Therefore, the allocation is often a negotiated part of the sales agreement. Both parties should submit a purchase price allocation, and it's best to agree on it before closing to avoid potential issues with the IRS. In an asset sale, the purchase price is first allocated to tangible assets, with the remainder allocated to intangible assets such as goodwill.