Elliot Pisem and David E. Kahen
In general, amounts paid to “facilitate” an acquisition of assets constituting a trade or business or an ownership interest in a business entity must be capitalized and may not be deducted currently (Internal Revenue Code (Code) §263; Reg. §1.263(a)-5). These amounts include facilitative costs contingent on the successful completion of a transaction (“success-based fees”), such as a typical finder’s fee or broker fee.
Some costs are not treated as “facilitating a transaction” and may be currently deductible. These costs include employee compensation, the costs of integrating business operations, and costs of investigating a potential transaction that are incurred before a letter of intent is executed or the material terms of a transaction are otherwise agreed upon. A success-based fee may be allocable to various activities, some of which are treated as “facilitative” and some of which are not.
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