Can You Write Off the Purchase of a Business?

You cannot deduct the price of a business the way you deduct rent or payroll. Federal tax law treats writing off the purchase of a business as a recovery process spread across several categories: tangible assets come off through depreciation, intangibles like goodwill amortize over 15 years, and inventory hits your return as cost of goods sold when the items resell. Some equipment can be written off in full the first year under Section 179 or 100-percent bonus depreciation. How fast the rest comes back to you depends on how the deal is structured and how the price is divided among the assets you acquired.

Deal Structure Decides What You Can Deduct

The choice between buying assets and buying stock controls whether you start fresh on depreciation or inherit the seller’s remaining basis. For most buyers, this decision matters more to after-tax cost than the headline price does.

Asset Purchases

In an asset purchase, you buy the individual items that make up the business: equipment, inventory, customer lists, real estate, and goodwill. Each asset takes a new tax basis equal to the fair market value allocated to it in the deal. Fresh basis means new depreciation and amortization schedules, which front-loads deductions and improves cash flow in the early years. Asset deals are the most tax-friendly structure for most buyers and the default for small and mid-market acquisitions.

Stock Purchases

When you buy stock, you are buying the legal entity, not its individual assets. Everything inside the company keeps whatever depreciation schedule it already had. If the seller had depreciated a piece of equipment down to $10,000, that is the basis you inherit, even if the equipment was effectively worth $80,000 in the deal. Your purchase price sits in stock basis and comes back to you only when you eventually sell or liquidate the company.

The Section 338 Election

Certain corporate buyers can get asset-purchase tax treatment while keeping the legal simplicity of a stock deal. A Section 338 election causes the IRS to treat the target as if it sold all its assets at fair market value and then repurchased them as a new entity, producing a stepped-up basis in every asset.¹

The catch: Section 338 is available only to corporate purchasers, and the commonly used 338(h)(10) version requires the target to be a subsidiary of a consolidated group, an affiliated corporation, or an S corporation. The buying corporation must acquire at least 80 percent of the target’s stock within a 12-month window, both sides must jointly elect, and the seller recognizes taxable gain on the deemed asset sale. Individuals, partnerships, and most private-equity fund structures cannot make the election without an intervening corporate entity.

Allocating the Purchase Price

In any asset acquisition, the total price must be divided among the specific items being sold. This allocation determines whether your dollars sit in fast-depreciating equipment, 15-year intangibles, or long-lived real estate. Federal law requires both buyer and seller to use the residual method, working through seven prescribed asset classes in priority order.²

Both parties report the allocation on IRS Form 8594, attached to the return for the year the sale closes.³ The seven classes, in the order consideration is allocated, are:

Class I: Cash and bank deposits.
Class II: Actively traded securities and similar liquid assets.
Class III: Accounts receivable, mortgages, and similar debt instruments.
Class IV: Inventory (stock in trade).
Class V: Tangible property like land, buildings, furniture, vehicles, and equipment.
Class VI: Intangibles other than goodwill, such as covenants not to compete.
Class VII: Goodwill and going concern value.

You fill each class up to fair market value before moving to the next, and whatever consideration is left after Classes I through VI drops into Class VII as goodwill.⁴ A written allocation agreement signed by both parties binds them for tax purposes unless the IRS finds the values unreasonable.² The buyer generally wants more value in Class V (short depreciation lives) and less in Class VII (15-year amortization). The seller often prefers the opposite. Negotiating the allocation is one of the most consequential parts of any business purchase.

Fast Write-Offs: Equipment and Other Tangible Property

Physical assets like machinery, vehicles, computers, and furniture offer the quickest path to recovering your purchase price. These items depreciate under the Modified Accelerated Cost Recovery System (MACRS), which assigns each type of property a recovery period based on its class life.⁵ Common recovery periods:

5 years: Computers, automobiles, light trucks, and certain office machinery.
7 years: Office furniture and fixtures, general-purpose equipment without a designated class life.
15 years: Land improvements like parking lots and fences.
39 years: Non-residential buildings such as offices, warehouses, and retail space.

Those schedules are the baseline. Two provisions frequently accelerate the timing much further.

Section 179 Expensing

Section 179 lets you deduct the full cost of qualifying equipment, furniture, and certain other tangible property in the year you place it in service. For tax years beginning in 2026, the maximum deduction is $2,560,000. That ceiling phases out dollar-for-dollar once total qualifying property placed in service exceeds $4,090,000. Sport utility vehicles have a separate $32,000 cap.⁵

Your Section 179 deduction in any year cannot exceed the taxable income from your active trade or business. If the deduction is larger than your business income, the unused portion carries forward instead of creating a loss. That prevents buyers from using Section 179 to shelter wages or investment income.

Bonus Depreciation

The One, Big, Beautiful Bill Act, signed on July 4, 2025, permanently restored 100-percent bonus depreciation for qualified property acquired after January 19, 2025.⁶ For property placed in service in 2026, you can deduct the entire cost in year one.⁷ Unlike Section 179, bonus depreciation can generate a net operating loss, which makes it useful for buyers whose acquisition-year income is modest relative to the equipment value.

Between the two provisions, a buyer who acquires $500,000 in equipment can realistically wipe that entire amount off taxable income in year one. Tangible assets are where the near-term tax savings live, which is why the Class V allocation deserves close attention.

Slow Write-Offs: Goodwill and Other Intangibles

Intangible assets often eat up the largest share of the purchase price. Goodwill alone, the premium you pay above the fair market value of identifiable assets, frequently accounts for half or more of the total. Federal law groups acquired intangibles under Section 197 and requires straight-line amortization over 15 years, starting in the month you close.⁸

The 15-year rule covers goodwill, going concern value, trademarks, trade names, customer lists, workforce-in-place, patents, covenants not to compete, and franchises. It applies even when the underlying asset has a shorter useful life. A five-year non-compete still amortizes over 15 years. So does a patent with only eight years left.⁸ The statute blocks any attempt to use a faster method.

Allocate $1,500,000 to goodwill and trademarks combined, and your deduction is $100,000 a year for the next 15 years. Steady and predictable, but slow. Buyers who want faster recovery should push during negotiations to move value from Class VII into tangible equipment in Class V.

Inventory Comes Off Through Cost of Goods Sold

Inventory follows its own recovery path. The amount allocated to inventory (Class IV on Form 8594) becomes your tax basis in the goods. You do not depreciate or amortize it. Instead, you recover the cost through cost of goods sold as individual items sell. The deduction lands when you make the sale, not when you bought the business.

For retail, wholesale, and manufacturing acquisitions, inventory can be a large share of the price. Because recovery tracks turnover, tying up a big portion of the purchase price in inventory means slower tax recovery than equipment or even intangibles. Project first-year cash flow with your expected turnover in mind.

Pre-Closing Costs: Investigation vs. Transaction Costs

Money you spend before closing falls into two very different buckets. Getting the split right changes when, and whether, those dollars produce a deduction.

Investigation and Startup Costs

If you are entering a trade or business you do not already operate in, pre-acquisition investigation costs are treated as startup expenditures under Section 195. You can deduct up to $5,000 in the year the business begins operating, but that $5,000 shrinks dollar-for-dollar once total startup costs exceed $50,000. Whatever remains amortizes over 180 months (15 years), starting the month the business opens.⁹

Startup expenditures are defined to include amounts paid while investigating the creation or acquisition of an active trade or business.⁹ If you already operate in the same type of business you are acquiring, Section 195 may not apply because you are expanding an existing trade rather than starting a new one. In that case, ordinary-and-necessary investigation costs may be currently deductible, though facilitation costs still get capitalized.

Transaction Costs Get Capitalized

The professional fees that stack up during an acquisition — attorney charges for drafting the purchase agreement, accountant fees for due diligence, broker commissions, appraisals — generally cannot come off as current business expenses. Section 263(a) requires you to capitalize them into the basis of the assets or stock you acquire.¹⁰

In an asset deal, capitalized transaction costs fold into the basis of individual assets and come back through the same depreciation and amortization schedules. In a stock deal without a Section 338 election, they sit in stock basis indefinitely and only surface when you sell or liquidate. For a long-term hold, that can mean waiting decades to see any tax benefit from tens of thousands of dollars in fees.

The line between investigating whether to buy and completing the purchase can be blurry, and getting it wrong means misclassifying costs that should have been capitalized into asset basis.

Buying a Business With Existing Losses

Acquiring a company with accumulated net operating losses can look like a built-in shelter, but Section 382 sharply limits how much of those pre-acquisition losses you can use each year. When more than 50 percent of a loss corporation’s stock changes hands during a rolling three-year testing period, the IRS treats that as an ownership change and caps annual loss usage.¹¹

The annual cap equals the value of the old loss corporation multiplied by the federal long-term tax-exempt rate the IRS publishes monthly. On a $5 million acquisition, that might translate to only $200,000 to $250,000 in usable pre-change losses per year — far less than the full accumulated balance. If the new owner does not continue the acquired company’s business enterprise for at least two years after the change date, the annual cap drops to zero and the losses become worthless.¹¹

Never pay a premium for a target’s loss carryforwards without modeling the Section 382 limitation first. What looks like $2 million in ready-to-use losses on paper may only deliver $50,000 to $100,000 in annual tax savings once the cap applies.

1
Office of the Law Revision Counsel. 26 USC 338 – Certain Stock Purchases Treated as Asset Acquisitions
2
Office of the Law Revision Counsel. 26 USC 1060 – Special Allocation Rules for Certain Asset Acquisitions
3
Internal Revenue Service. About Form 8594, Asset Acquisition Statement Under Section 1060
4
Internal Revenue Service. Instructions for Form 8594
5
Internal Revenue Service. Publication 946, How To Depreciate Property
6
Internal Revenue Service. One, Big, Beautiful Bill Provisions
7
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
8
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
9
Office of the Law Revision Counsel. 26 USC 195 – Start-Up Expenditures
10
Office of the Law Revision Counsel. 26 USC 263 – Capital Expenditures
11
Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change