Question

If a taxpayer purchases a business and the price exceeds the fair market value of the listed assets, how is the excess allocated among the purchased assets?

A) The excess is not allocated, and the taxpayer incurs no tax consequences.
B) The excess is deducted from the purchase price, reducing the overall cost basis of the assets.
C) The excess is allocated based on the taxpayer's preference with no tax implications.
D) The excess is allocated among the purchased assets and may result in taxable income for the purchaser.

Answer 1

When a taxpayer purchases a business and the price exceeds the fair market value of the listed assets, the excess is allocated among the purchased assets, which may result in taxable income for the purchaser.

Step-by-step explanation:

When a taxpayer purchases a business and the price exceeds the fair market value of the listed assets, the excess is allocated among the purchased assets. This means that the excess amount is spread across the different assets that were purchased. The allocation is usually based on the fair market value of each asset at the time of purchase.

This allocation of the excess among the purchased assets may result in taxable income for the purchaser. The taxpayer may need to report this excess as income on their tax return, which could potentially lead to additional tax liability.

In summary, the correct answer is option D) The excess is allocated among the purchased assets and may result in taxable income for the purchaser.