Success fees in acquisitions need to be capitalized only in part, the IRS said in April.
A success fee is a fee paid by one company acquiring another company or project to an adviser for help putting together the transaction. The fee is contingent on a successful closing.
It is usually better to deduct such fees immediately than to have to fold them into basis in shares of the company being acquired. However, where assets are purchased, it may be better in some cases to add the fee to basis in the assets.
IRS rules require that any fee paid to someone to facilitate the transaction must be capitalized, or added to basis.
This has been an area of controversy. In a peace offering, the IRS said that it will no longer challenge taxpayers who deduct 70% of the fee and capitalize 30%. The theory is that only 30% of the success fee is for facilitating the transaction while the rest is for other activities.
The IRS announcement is in Revenue Procedure 2011-29.