Purchase price allocation examples, with the arithmetic shown
Short answer
In a purchase price allocation, you subtract cash (Class I), then fill Classes II to VI in order, each asset up to its fair market value, and give whatever is left to goodwill (Class VII). Example: a $900,000 price with $20,000 cash, $60,000 receivables, $25,000 inventory, $200,000 equipment and a $90,000 customer list leaves $505,000 for goodwill. If the price runs out before Class VI, the last class reached is split in proportion to fair market value and goodwill gets nothing.
The rules for allocating a business purchase price fit on a page. Applying them is where people trip, usually on the cases that aren't tidy: a price that doesn't cover the equipment, a rebate a year later, a true-up that adds money. Below are four worked examples using the residual method that Section 1060 requires for asset purchases. All four businesses are made up, and the numbers are chosen to make the arithmetic easy to follow. None of this is tax advice.
The method in one paragraph
The Form 8594 instructions tell you to reduce the consideration by the Class I assets (cash and general deposit accounts), then allocate what remains to Class II, III, IV, V and VI assets in that order, with each asset capped at its fair market value on the purchase date and assets within a class sharing in proportion to fair market value. Whatever is left goes to Class VII, goodwill and going concern value. If an asset could fit two classes, it goes in the lower-numbered one. The instructions point to Treasury regulations 1.338-6 and 1.338-7 for the mechanics, substituting "consideration" for the terms used there.
Example 1: a standard allocation
Illustration, not a real deal
Say you buy the assets of a commercial printing business for $900,000, and the seller leaves $20,000 in the operating account for you. Fair market values on the closing date: receivables $60,000, paper and ink inventory $25,000, presses and finishing equipment $200,000, and a customer list valued at $90,000.
| Step | Class | Allocated | Consideration left |
|---|---|---|---|
| Start | $900,000 | ||
| 1 | I cash | $20,000 | $880,000 |
| 2 | III receivables | $60,000 | $820,000 |
| 3 | IV inventory | $25,000 | $795,000 |
| 4 | V equipment | $200,000 | $595,000 |
| 5 | VI customer list | $90,000 | $505,000 |
| 6 | VII goodwill | $505,000 | $0 |
Check: $20,000 + $60,000 + $25,000 + $200,000 + $90,000 + $505,000 = $900,000. On Form 8594 line 4 the buyer and seller would each show Classes VI and VII together at $595,000.
Notice what drove the goodwill number. Nobody valued goodwill directly. It is whatever the buyer paid above the fair value of everything else, which is why weak support for the equipment or customer list values feeds straight into the goodwill figure.
Example 2: the price doesn't cover the equipment
Illustration, not a real deal
Say you buy the assets of a small machine shop for $400,000. No cash or receivables transfer. The appraisals show inventory at $50,000, and three Class V assets: a CNC mill at $300,000, a lathe at $100,000 and a truck at $50,000, for $450,000 of Class V value. There's also a customer list worth $40,000.
- Class IV: inventory takes $50,000. $400,000 − $50,000 = $350,000 left.
- Class V: $350,000 is less than the $450,000 of Class V value, so it is shared in proportion to fair market value.
- Mill: $300,000 ÷ $450,000 × $350,000 = $233,333.
- Lathe: $100,000 ÷ $450,000 × $350,000 = $77,778.
- Truck: $50,000 ÷ $450,000 × $350,000 = $38,889.
- Classes VI and VII: nothing left, so the customer list and goodwill get $0.
Check: $50,000 + $233,333 + $77,778 + $38,889 = $400,000 (the Class V figures are rounded to the dollar).
A result like this is a prompt to look again. It says a willing buyer paid less than the appraised value of the machines alone. Sometimes that's real: a seller who needs to exit fast, or equipment that's worth more piecemeal than in this business. Often it means the appraisal used a premise of value that doesn't fit the deal. Tax law caps each asset at fair market value; it doesn't make an inflated appraisal correct. For financial reporting the same facts could produce a bargain purchase gain under ASC 805, which is a separate exercise covered in ASC 805 purchase price allocation.
Example 3: a rebate the following year
Illustration, not a real deal
Go back to Example 1. Fourteen months after closing, in the buyer's next tax year, a large customer the seller said was secure leaves. The purchase agreement had a performance rebate, and the seller pays the buyer $45,000.
The Form 8594 instructions say a decrease comes off Class VII first, then Class VI, then V, IV, III and II, and nothing goes below zero. Goodwill was $505,000, which more than covers the rebate:
- Goodwill: $505,000 − $45,000 = $460,000.
- Every other class is unchanged.
- Total consideration is now $855,000.
Because the change happened after the year of sale, each affected party files a new Form 8594 with Parts I and III for the year the decrease is taken into account, showing the previous allocation, the decrease and the redetermined allocation, with the reason. The buyer also has to deal with the goodwill already amortized before the change; the instructions say to apply the tax principles for a cost reduction after an asset has been partly recovered, which is a question for the tax preparer.
SBA deals: seller earnouts are prohibited on SBA change-of-ownership loans, but buyer rebates based on performance are allowed. The rebate must go to pay down the 7(a) loan principal. Expect it to show up twice: in the loan file and on the supplemental Form 8594.
Example 4: a price increase after closing
Illustration, not a real deal
Now say the Example 1 agreement had a working-capital true-up, and the final closing statement shows the buyer owes the seller another $15,000, paid in the same tax year as the sale. Because it falls in the same year, it is treated as if it happened on the purchase date, so the original Form 8594 simply reflects $915,000 of consideration.
An increase is allocated starting with Class I and working up, never above an asset's fair market value except in Class VII. In Example 1, every asset in Classes I to VI already sits at its fair market value, so there's no room in any of them. The whole $15,000 goes to goodwill: $505,000 + $15,000 = $520,000.
There's a trap here. If the true-up happened because the closing inventory count was wrong and there was actually $15,000 more inventory, then inventory's fair market value on the purchase date was $40,000, not $25,000. Fix the inventory figure; don't push the money into goodwill because it's convenient. The class order only works if the fair market values in the schedule are right.
Common mistakes these examples expose
| Mistake | What goes wrong |
|---|---|
| Leaving assumed liabilities out of consideration | Goodwill is understated by the liabilities assumed |
| Allocating equipment at book value | Book value after years of depreciation is rarely fair market value |
| Putting the whole price in goodwill | Inventory and equipment get no basis; the residual method isn't followed |
| Pushing equipment above appraisal | Breaks the fair market value cap for Classes I to VI |
| Forgetting the supplemental Form 8594 | Later rebates or true-ups go unreported |
| Buyer and seller using different numbers | Inconsistent filings invite questions from the IRS |
How to run your own
- Total the consideration: cash, seller note, liabilities assumed, and any other consideration your adviser says counts.
- List every transferring asset by class, using the bill of sale.
- Get support for fair market value: a count for inventory, an appraisal for equipment and real estate, a valuation for material intangibles.
- Run the classes in order, prorating within a class when the money runs out.
- Put the result in a signed allocation schedule and file matching Forms 8594.
- Diary the dates of any true-up or rebate so supplemental statements aren't missed.
Why the allocation matters to each side's tax bill is covered in purchase price allocation tax considerations, and the statute and regulations behind the method in Section 1060 purchase price allocation. Rules checked against the Form 8594 instructions (Rev. 11/2021) and the eCFR as of October 2026.
Common questions
What if the price is less than the value of the tangible assets?
The residual method still runs in order. When the consideration runs out partway through a class, what is left is shared among that class's assets in proportion to their fair market values, and later classes, including goodwill, get zero.
Is there ever negative goodwill for tax?
No. Under the residual method, Class VII simply receives nothing if earlier classes absorb the whole price. Financial reporting under ASC 805 handles a bargain purchase differently, by recognizing a gain.
Does a later rebate change the allocation?
Yes. A decrease in consideration comes off Class VII first, then Class VI, then V and down. If it happens after the year of sale, the affected party files a supplemental Form 8594 for the year it is taken into account.
Do I allocate per asset or per class?
Per asset for your own basis records, because each asset is depreciated or sold separately. Form 8594 only asks for class totals, with Classes VI and VII combined.
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.