Purchase Price Allocation (PPA): A Simple Guide for Business Sellers

If this is your first time selling a business, here is the key idea: your tax bill is not based only on the headline sale price. It is also based on how that price is split across different asset “buckets” (called classes).

That split is called purchase price allocation (PPA), and it can change how much money you keep after closing.

Plain-English definition

In an asset sale, buyer and seller agree on a total price (for example, $5,000,000). Then that amount is allocated across categories like inventory, equipment, customer relationships, and goodwill. Each category can be taxed differently.

That is why two deals with the same total price can produce very different seller net proceeds.

Why sellers should care early

Net proceeds: allocation affects your after-tax cash.
Negotiation power: price and allocation are linked; they should be negotiated together.
Fewer surprises: addressing PPA early helps avoid end-of-deal tax surprises.

The classes in simple terms (seller view)

The IRS uses asset classes in asset acquisitions (commonly discussed as Classes I–VII). You do not need to memorize them, but you should understand the tax pattern:

Cash / near-cash items: usually little or no gain impact.
Accounts receivable and inventory: often taxed at ordinary income rates.
Depreciable equipment/fixed assets: some portion can be ordinary income through depreciation recapture; the rest may receive capital gain treatment.
Identifiable intangibles: tax treatment depends on the specific asset.
Goodwill / going-concern value: generally taxed at long-term capital gains rates.

What tax rates are we talking about?

For many sellers, the headline federal comparison is:

Ordinary income: up to 37% federal
Long-term capital gains: generally 0% / 15% / 20% federal, plus possible 3.8% NIIT for some taxpayers

State taxes can materially change your real result.

Simple example: same deal price, different seller outcome

Assume a $5,000,000 asset sale. Here is one possible allocation:

Inventory: $500,000 (often ordinary income)
Equipment: $1,000,000 (mixed treatment; recapture can be ordinary)
Customer relationships / other intangibles: $1,000,000 (depends on category)
Goodwill: $2,500,000 (often capital gain)

If more value is pushed into ordinary-income buckets, seller taxes can rise. If more value lands in capital-gain buckets (where supportable), seller net proceeds can improve. This is why allocation should be discussed with your CPA before final docs are signed.

Bottom line

For sellers, purchase price allocation is not accounting trivia — it is a major driver of what you actually keep. If this is your first sale, getting PPA right can save real money and reduce closing stress. Lean on your broker, CPA, and attorney to help guide you through this. You don’t need to know it cold. You just need to be aware of it so you know how it affects your net proceeds.

Educational only; not tax or legal advice. Always consult your CPA and M&A attorney for transaction-specific guidance.