Purchase price allocation is the process of dividing the total purchase price of a business among its individual assets for tax purposes.
Purchase price allocation is the method of assigning the purchase price of a business to the assets sold for purposes of determining taxes owed by the seller and tax basis for the buyer. Both buyers and sellers should submit a purchase price allocation for the tax year of the sale, and it is best practice to agree on an allocation prior to closing. Sellers generally prefer to allocate more of the purchase price to capital gain assets and intangibles, while buyers typically prefer to allocate more to assets that can be depreciated rapidly.
In an asset sale, the purchase price is allocated first to the actual value of tangible assets, and the remaining balance is allocated to intangible assets.