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PostHeaderIcon Asset Purchases, Cost Segregation Studies and the Peco Foods Tax Court Case

Doing a cost segregation study could be a beneficial exercise for a company that owns real estate but the Tax Court recently dealt a blow to those looking at a cost segregation study on assets acquired in an asset acquisition.  While usually more beneficial to the purchaser because the goodwill is amortizable for tax purposes, one of the exercises of an asset purchase is Form 8594 which basically makes you pool the assets purchased into buckets based on their character.  The Form is then filed with both the seller’s and purchaser’s tax return.

Putting a little extra time into Form 8594 is even more important now because of the Peco Foods Tax Court Case.  What the tax court determined was that the allocation done on Form 8594 is binding and that you’re not allowed to subsequently do a cost segregation study on the assets that were purchased.  You’re not even allowed to elect a Change in Method of Accounting on Form 3115 to effectuate a change in the allocation so once the Form 8594 is done, you’re stuck.

The moral of the story is, take the extra time to get this allocation done and as much to your benefit as you can.  You can usually work with the seller to get a solid allocation done that helps both of you so put in the extra time either during the negotiations or once the sale is getting close to being finalized because the final allocation could have ramifications for years to come.