Asset Allocation in an S-Corp Sale – The Seller’s Perspective

As you’ve already learned in Selling an S-Corp, a stock sale is preferable for sellers, but buyer’s will typically want an asset sale. In the case of an asset sale, there are still decisions that help favor the seller, and a big one is asset allocation. Not sure what we’re talking about? Check out Asset vs. Stock Sale for a quick rundown.

The following table provides an outline of the different “classes” that the IRS provides for asset allocation in a business sale as well as the seller’s perspective toward which classes are preferred for a higher or lower allocation amount. If the shoe is on the other foot, check out Buying an S-Corp to see the buyer’s perspective. Our team at s-corp.biz is here to help small businesses with all things s-corp!

Also feel free to download our PDF version of the table.

IRS Asset Class	Type of Assets	The Seller’s Perspective
Class I	Cash and general deposit accounts (Including savings and checking accounts, but does not include certificates of deposit held in banks, savings and loan associations, and other depository institutions).	No Preference
Class II	Actively traded personal property such as publicly traded stock and U.S. Government securities Certificates of deposit Foreign currency	No Preference
Class III	Accounts Receivable	No Preference
Class IV	Stock in trade Inventory	Low amount in allocation is preferred because it minimizes ordinary income
Class V	All other tangible assets that do not fall under one of the above classes (Includes furniture, fixtures, real estate, vehicles, equipment etc.)	The seller’s preference may depend on the type of assets falling under this class. For personal property assets such as furniture, fixtures etc., a low amount in allocation is preferred because it minimizes gain that will treated as ordinary income. For real estate assets, a high amount in allocation is preferred because it provides long-term capital gain treatment.
Class VI	Non-compete covenants Workforce in place Business books and records, operating systems, any other information base etc. Licenses, permits, etc. Franchise, trademark, or trade name (exception for certain professional sports franchises) All other intangible property that does not fall under Class VII	Low amount in allocation is typically preferred because it is taxed as ordinary income over the term of the covenant.
Class VII	Goodwill and going concern value	High amount in allocation is preferred because it is taxed as long-term capital gain.

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