Purchase price allocation: how to split a business price across assets
Short answer
Purchase price allocation (PPA) divides the price paid for a business across the assets acquired. For US taxes on an asset purchase, Section 1060 requires the residual method: the price is allocated through seven asset classes in order, each asset capped at fair market value, with whatever is left going to goodwill (Class VII). Buyer and seller generally both report it on Form 8594. For financial reporting, ASC 805 requires a separate fair-value allocation.
Every asset purchase has a moment where someone asks, "How much of the price is for the equipment?" The answer has tax consequences for both sides for years. This guide covers the tax rules (Section 1060 and Form 8594), the book rules (ASC 805) and how the allocation interacts with an SBA loan. It isn't tax advice; your tax adviser decides how you report.
The seven asset classes
| Class | What's in it (per Form 8594 instructions) | Typical small-business examples |
|---|---|---|
| I | Cash and general deposit accounts (not CDs) | Operating bank account, if transferred |
| II | Actively traded personal property, CDs, foreign currency | Rare in small deals |
| III | Assets marked to market and debt instruments, including accounts receivable | Receivables |
| IV | Inventory and property held primarily for sale to customers | Stock, parts, finished goods |
| V | All other assets: generally furniture, fixtures, buildings, land, vehicles, equipment | Equipment, vans, leasehold improvements |
| VI | Section 197 intangibles except goodwill and going concern value | Customer lists, non-compete, trade name, licenses, workforce in place |
| VII | Goodwill and going concern value | The residual |
The residual method
Per the Form 8594 instructions: reduce consideration by Class I assets; allocate the rest to Class II, then III, IV, V and VI in order, each asset capped at its fair market value on the purchase date and allocated within a class in proportion to fair market value; whatever remains goes to Class VII. More in Section 1060.
A worked example
Illustration, not a real deal
Say you buy the assets of an HVAC service company for $2,400,000. You don't take cash or receivables. Fair market values: inventory $90,000; trucks and equipment $410,000; a three-year non-compete $60,000; customer service agreements $350,000; trade name $40,000.
| Class | Assets | Allocated | Remaining price |
|---|---|---|---|
| IV | Inventory | $90,000 | $2,310,000 |
| V | Trucks and equipment | $410,000 | $1,900,000 |
| VI | Non-compete, customer agreements, trade name | $450,000 | $1,450,000 |
| VII | Goodwill (residual) | $1,450,000 | $0 |
For the buyer, Class V assets are depreciated under the usual rules, and Classes VI and VII (Section 197 intangibles) are amortized over 15 years. For the seller, how much is ordinary income versus capital gain depends on the asset classes and their history. That's why the two sides often negotiate the allocation. More examples in PPA examples.
Reporting: Form 8594
Generally both buyer and seller attach Form 8594 to their returns for the year of sale when a group of assets that makes up a trade or business is transferred and goodwill or going concern value attaches or could attach. If consideration changes later (a price adjustment, for example), a supplemental 8594 is filed for the year the change is taken into account. Penalties can apply for failing to file a correct form. See Form 8594 explained.
Book PPA under ASC 805
Companies reporting under US GAAP account for business combinations under ASC 805, which recognizes identifiable assets and liabilities at fair value and goodwill as the residual, with its own rules on intangible identification and measurement. The book and tax allocations often differ, creating deferred taxes. Private companies may have accounting alternatives available. See ASC 805 PPA.
PPA and SBA loans
The SBA valuation and the tax allocation are different exercises, but they shouldn't contradict each other without explanation. A few links:
- SBA collateral values equipment at 50% of net book value (80% with an orderly liquidation appraisal). An allocation that puts a high value on equipment doesn't change those haircuts.
- Special purpose property valuations for SBA must themselves allocate value among land, building, equipment and intangibles.
- Vehicles bought with the loan: SBA's vehicle lien threshold can use the purchase price allocable to the vehicle.
- Non-compete and consulting payments: SBA allows the seller to consult for up to 24 months; how those payments and any non-compete are allocated is a tax question for your adviser.
Why buyer and seller want different allocations
The total price is fixed; the allocation decides how each side is taxed on it. That's why it's negotiated, and why the IRS asks both sides to report it. In broad terms (your tax adviser will apply the details):
| Class | Buyer's view | Seller's view |
|---|---|---|
| IV Inventory | Recovered quickly as inventory is sold | Generally ordinary income on any gain |
| V Equipment | Depreciated, often quickly | Gain up to prior depreciation is generally recaptured as ordinary income |
| V Buildings and land | Buildings depreciated over long lives; land not depreciated | Generally capital gain treatment, subject to special rules |
| VI Non-compete | Amortized over 15 years under Section 197 | Generally ordinary income |
| VI Other intangibles; VII goodwill | Amortized over 15 years under Section 197 | Self-created goodwill generally produces capital gain |
So buyers tend to prefer more in inventory and equipment, which they recover faster, while sellers tend to prefer more in goodwill, which is often taxed at capital gains rates. The constraint on both is that allocations to Classes I through VI can't exceed each asset's fair market value on the purchase date. Goodwill takes the residual. An allocation that loads equipment above its appraised value to speed up the buyer's deductions isn't supportable.
Asset purchase vs stock purchase
All of this applies to asset purchases. When a buyer buys stock, the company keeps its own tax basis in its assets, so there's no new allocation and no Form 8594 for the share purchase itself, unless the parties make an election that treats the stock purchase as an asset purchase for tax purposes, such as under Section 338(h)(10) or Section 336(e), where those are available. Most SBA-financed small business acquisitions are structured as asset purchases, partly for this reason; buyers also avoid inheriting the selling entity's unknown liabilities.
When the price changes after closing
Working capital true-ups, buyer rebates and other post-closing adjustments change the consideration. The Form 8594 instructions set the order: an increase is allocated starting with Class I and working up, never above fair market value except in Class VII; a decrease comes off Class VII first, then VI, V and so on down, and no asset goes below zero. The affected party files a supplemental Form 8594 for the year the change is taken into account. On SBA deals, a performance rebate from seller to buyer must also pay down the 7(a) loan, so the same event shows up in the loan file and the tax filings.
Real estate in the allocation
If the deal includes the building, the price allocated to real estate is a Class V asset, and the split between land and building matters because land isn't depreciated. The real estate appraisal the SBA lender orders is a natural starting point for that split. Where the property is special purpose (a hotel or car wash, for example), SBA's going-concern appraisal already allocates value among land, building, equipment and intangibles, and using a consistent allocation across the loan file and the tax filings avoids awkward questions later.
How the allocation interacts with the SBA loan file
- Equipment allocated in the purchase agreement should be consistent with any equipment appraisal the lender relied on for collateral.
- The non-compete allocation should match an actual non-compete agreement in the closing documents.
- Consulting payments to the seller are compensation for services, not part of the purchase price, and they must stay within SBA's 24-month limit.
- The allocation doesn't change the SBA valuation, which must support the Business Purchase Price as a whole.
Identifying the Class VI intangibles
The Form 8594 instructions list what counts as a Section 197 intangible, and most small business deals contain several. They include workforce in place; business books and records, operating systems, processes, designs, know-how and similar information; customer-based intangibles such as customer lists and service contracts; supplier-based intangibles; licences, permits and other rights granted by a government unit; a covenant not to compete entered into in connection with the acquisition; and any franchise, trademark or trade name. The instructions also list exclusions, among them interests in a corporation or partnership, interests in land, certain computer software, interests under leases of tangible property and interests under indebtedness.
Valuing these separately matters because it determines how much of the residual is left for goodwill, and because a buyer's financial statements under ASC 805 recognize identifiable intangibles separately from goodwill. For tax purposes, Classes VI and VII are both amortized over 15 years by the buyer, so the split between them affects reporting more than the buyer's deductions; for the seller, a non-compete allocation is typically treated differently from goodwill.
What a defensible allocation rests on
- Inventory counted near closing and priced on a consistent basis.
- An equipment appraisal, or at least a reasoned schedule, for Class V assets.
- A real estate appraisal splitting land and building, where property is included.
- A valuation of significant identifiable intangibles (customer relationships, non-compete, trade name).
- A written allocation schedule in the purchase agreement, agreed by both sides.
- Matching Forms 8594 filed by buyer and seller.
Getting it right
- Agree the allocation (or at least the method) in the purchase agreement, and file consistently.
- Support fair values with an independent valuation of tangible and intangible assets where amounts are material.
- Document the non-compete's terms if you allocate value to it.
- Track later price adjustments; they require supplemental reporting.
- Have your tax adviser review before signing, not after.
Tax references checked against IRS Form 8594 instructions (revised 11/2021) and the eCFR on October 25, 2026.
OKtoLend prepares purchase price allocations that line up with the purchase agreement and Form 8594. Tell us about the deal and we'll reply with pricing and timing within one business day. This guide is not tax advice.
Common questions
Do buyer and seller have to use the same allocation?
If they agree to an allocation in writing, the agreement generally binds both for tax purposes under Section 1060, and Form 8594 asks whether such an agreement exists. Without one, each side files its own allocation.
Why does the allocation matter?
It determines the buyer's tax basis and depreciation or amortization schedule, and the character of the seller's gain (ordinary vs capital). Equipment, inventory and goodwill are taxed differently.
Is a PPA needed in a stock purchase?
Generally not for tax, because the buyer takes the existing basis in the shares, unless an election such as 338(h)(10) or 336(e) treats it as an asset purchase. Book accounting under ASC 805 may still require one.
How is goodwill amortized for tax?
Goodwill and most other Section 197 intangibles acquired in an asset purchase are amortized over 15 years for tax.
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.