Form 8594: how the IRS allocation of purchase price works
Short answer
Form 8594, the Asset Acquisition Statement under Section 1060, is how buyer and seller tell the IRS how the price of a business's assets was allocated. Both generally attach it to their returns for the year of sale when a group of assets that makes up a trade or business is transferred, goodwill or going concern value attaches or could attach, and the buyer's basis is determined only by the amount paid. The price is allocated across seven asset classes using the residual method, with goodwill taking whatever is left.
Form 8594 is short, two pages, but the numbers on it follow buyer and seller for years. The buyer's depreciation and amortization, and the seller's mix of ordinary income and capital gain, both flow from the allocation it reports. This guide follows the IRS instructions (revised November 2021) section by section. It isn't tax advice; your tax adviser prepares and signs your return.
Who must file
According to the instructions, both the purchaser and the seller generally must file Form 8594 and attach it to their income tax returns (Forms 1040, 1041, 1065, 1120, 1120-S and so on) when there is a transfer of a group of assets that makes up a trade or business and the purchaser's basis in those assets is determined wholly by the amount paid. That applies whether the assets are a trade or business in the seller's hands, the buyer's, or both.
A group of assets is a trade or business if goodwill or going concern value could under any circumstances attach to it. The instructions list factors that point that way: the presence of Section 197 or other intangibles; a price above the book value of the assets other than goodwill; or agreements between the parties such as a licence, lease, non-compete, management or employment contract. In a typical small business sale, all three are present.
Exceptions
- Like-kind exchanges: a group of assets exchanged in a Section 1031 transaction doesn't need Form 8594, except for any part of the group to which Section 1031 doesn't apply.
- Partnership interests: transferring a partnership interest doesn't require Form 8594 (other rules apply). But if buying a partnership interest is treated for tax purposes as buying the partnership's assets that make up a trade or business, Section 1060 applies and the purchaser must file.
When to file
Generally, attach Form 8594 to your return for the year in which the sale date occurred. If the amount allocated to any asset is increased or decreased after that year, whoever is affected completes Parts I and III and attaches the form to the return for the year the change is taken into account.
The seven asset classes
| Class | Contents (per the instructions) |
|---|---|
| I | Cash and general deposit accounts, other than certificates of deposit |
| II | Actively traded personal property, certificates of deposit and foreign currency (for example US government securities and publicly traded stock) |
| III | Assets marked to market at least annually and debt instruments, including accounts receivable, with listed exceptions |
| IV | Stock in trade, inventory and property held primarily for sale to customers |
| V | All other assets; furniture and fixtures, buildings, land, vehicles and equipment are generally Class V |
| VI | Section 197 intangibles except goodwill and going concern value |
| VII | Goodwill and going concern value |
If an asset could fit in more than one class, the instructions say to choose the lower-numbered class.
The residual method
The instructions direct filers to use the residual method of Regulations sections 1.338-6 and 1.338-7, substituting consideration for the terms used there. In order:
- Reduce the consideration by the Class I assets transferred.
- Allocate the rest to Class II, then III, IV, V and VI, in that order. Within each class, allocate in proportion to fair market values on the purchase date.
- No asset in Classes I to VI can receive more than its fair market value.
- Whatever is left goes to Class VII.
Two definitions matter. Consideration is the buyer's cost of the assets and the seller's amount realized. Fair market value is gross fair market value, unreduced by mortgages, liens, pledges or other liabilities.
Line by line
Top of the form
Enter your own name and taxpayer identification number, and check whether you are the purchaser or the seller.
Part I: General information
- Line 1: the other party's name, address and TIN. The instructions say the other party's TIN is required: a Social Security number for an individual or sole proprietor, an employer identification number for an entity.
- Line 2: the date of sale.
- Line 3: the total consideration transferred for the assets.
Part II: Original statement of assets transferred
- Line 4: for each class, the total fair market value of the assets and the total allocation of the sales price. Classes VI and VII are entered combined: their total fair market value and their total allocation together.
- The other Part II questions ask whether buyer and seller agreed an allocation in a sales contract or other written document, and whether, in connection with the purchase, the buyer also entered into related arrangements with the seller, such as a non-compete, licence, lease, employment or management contract. Check the current form for the exact wording.
- Line 6: both parties complete it. To determine the maximum consideration to be paid, assume any contingencies in the agreement are met and the consideration is the highest possible amount; if it can't be determined, state how it will be computed and the payment period.
Part III: Supplemental statement
Complete Part III, with Part I, for each year an increase or decrease in consideration occurs. Give the reasons, and enter the tax years and form numbers with which the original and any supplemental statements were filed.
A worked example
Illustration, not a real deal. A buyer pays $1,500,000 for the assets of a service business. No cash is transferred. Fair market values on the purchase date: receivables $120,000; inventory $80,000; equipment and vehicles $300,000; identified Section 197 intangibles (customer contracts, trade name, non-compete) $200,000.
| Class | Fair market value | Allocation | Consideration remaining |
|---|---|---|---|
| I | $0 | $0 | $1,500,000 |
| III Receivables | $120,000 | $120,000 | $1,380,000 |
| IV Inventory | $80,000 | $80,000 | $1,300,000 |
| V Equipment, vehicles | $300,000 | $300,000 | $1,000,000 |
| VI Intangibles | $200,000 | $200,000 | $800,000 |
| VII Goodwill | residual | $800,000 | $0 |
On line 4, Classes VI and VII are reported together: an allocation of $1,000,000. Check: $120,000 + $80,000 + $300,000 + $1,000,000 = $1,500,000.
Two years later the seller pays the buyer a $50,000 rebate under the purchase agreement. Under the instructions, a decrease reduces Class VII first, so goodwill falls to $750,000. Each affected party files a new Form 8594 with Parts I and III for that year. On an SBA-financed deal, that rebate must also be applied to the 7(a) loan's principal.
Practical points for buyers and sellers
- Agree the allocation in the purchase agreement, so both forms match and Section 1060's written-agreement rule applies.
- Support each class with evidence: inventory counts, equipment and real estate appraisals, and a valuation of material intangibles.
- Collect the other party's TIN at closing; you need it for line 1.
- Diary any contingent payments; each year one is paid, a supplemental statement may be due.
- Keep the allocation consistent with other documents, such as a separately signed non-compete.
How Form 8594 connects to the lender's file
An SBA lender doesn't file Form 8594, but the allocation shows up in its file in other ways. Equipment allocated in the purchase agreement should be consistent with any equipment appraisal used for collateral. A non-compete allocation implies a signed non-compete. A rebate reported on a supplemental Form 8594 should also appear as a principal payment on the loan. And the lender's valuation must support the Business Purchase Price as a whole, whatever the tax allocation. OKtoLend prepares purchase price allocations designed to line up with both the purchase agreement and Form 8594. See the purchase price allocation guide for the buyer-seller trade-offs by class.
Common questions
Do buyer and seller have to file the same numbers?
Each files its own Form 8594. If they agreed an allocation in writing, Section 1060 generally binds both to it, so the forms should match. Mismatches invite questions.
Is Form 8594 needed for a stock purchase?
Not for a straightforward purchase of stock, because the company's asset basis doesn't change. Elections that treat a stock purchase as an asset purchase have their own reporting.
What if the price changes in a later year?
The affected party files a new Form 8594, completing Parts I and III, with its return for the year the increase or decrease is taken into account.
What happens if we don't file?
The instructions say penalties may apply under sections 6721 through 6724 if a correct form isn't filed by the return due date and there's no reasonable cause.
Related guides
Sources
This guide explains rules and practice in plain English. It isn't legal, tax or credit advice, and SBA and IRS rules change. Check the current SOP, regulations and your lender's requirements before you rely on anything here. Examples with made-up businesses are illustrations, not real deals.