Purchase price allocation tax considerations for buyers and sellers

Published October 25, 2026 · Rules checked against SBA and IRS sources as of October 2026

Short answer

For tax purposes, the allocation decides how fast the buyer recovers the price and how the seller's gain is taxed. Buyers generally prefer value in inventory and equipment, which they recover quickly, over 15-year intangibles and goodwill. Sellers generally prefer goodwill, which is often capital gain, over inventory, depreciation recapture or a non-compete, which are ordinary income. Every class except goodwill is capped at fair market value, so the room to negotiate is narrower than people think.

The total price is fixed. The allocation decides who pays what tax on it, when. That's why buyers and sellers argue about a schedule that doesn't change a single dollar changing hands at closing. This page walks through the tax effect of each asset class for both sides, the traps that cost people money, and what's genuinely negotiable. It's general information, not tax advice: the right answer depends on each party's entity type, basis, holding period and state, and you should run the numbers with your tax adviser before you sign.

The basic tension

For the buyer, the allocation sets the tax basis of each asset, which is recovered through cost of goods sold, depreciation or amortization. Faster recovery means earlier deductions. For the seller, a lump-sum sale of a business is treated as a sale of each asset separately, and IRS Publication 544 explains that each asset's gain is figured separately: inventory produces ordinary income, depreciable and real property used in the business can produce Section 1231 gain, and capital assets produce capital gain. Different classes, different tax.

General tendencies for an individual or pass-through seller. Entity type, basis and holding period change the answer.

Class by class

Class	Buyer	Seller
III receivables	Basis equal to amount allocated; collected with little or no income	Cash-basis sellers have no basis in receivables, so the allocation is ordinary income
IV inventory	Recovered through cost of goods sold as it's sold	Ordinary income or loss
V equipment and vehicles	Depreciated under MACRS; first-year expensing rules may apply	Gain up to prior depreciation is recaptured as ordinary income (Section 1245); any excess is Section 1231 gain
V buildings	Nonresidential real property depreciated over 39 years	Section 1231 gain, with depreciation-related gain taxed under special rules for individuals
V land	Not depreciable	Section 1231 or capital gain
VI non-compete	Amortized over 15 years	Generally ordinary income
VI other intangibles, VII goodwill	Amortized over 15 years under Section 197	Self-created goodwill generally produces capital gain for an individual seller

Two things jump out. First, for the buyer, everything in Classes VI and VII recovers on the same 15-year straight-line schedule, so moving value between a customer list and goodwill changes very little for the buyer's deductions. Second, the seller's best class, goodwill, is the buyer's slowest. The real negotiation is between Class V (and IV) on one side and Class VII on the other.

Worked example: the non-compete trap

Illustration, not a real deal

Say a buyer pays $1,000,000 for a business. Inventory and equipment are allocated at their fair market value of $300,000. The remaining $700,000 is intangible value. Compare two schedules:

	Schedule A	Schedule B
Non-compete	$0	$150,000
Goodwill	$700,000	$550,000
Buyer's annual Section 197 amortization	$700,000 ÷ 15 = $46,667	($150,000 + $550,000) ÷ 15 = $46,667
Seller's ordinary income from these lines	$0	$150,000

The buyer gets exactly the same deductions either way. The seller converts $150,000 from likely capital gain to ordinary income. Schedule B helps nobody's tax bill. If there's a real non-compete with real value, it belongs on the schedule at that value, because Form 8594 asks about it and an agreement with no allocated value can look odd. But inflating it is a cost to the seller with no benefit to the buyer.

Worked example: equipment and recapture

Illustration, not a real deal

Say the seller bought trucks for $400,000 and has depreciated them down to an adjusted basis of $50,000, so $350,000 of depreciation has been taken. The trucks' fair market value is $300,000.

Allocated $300,000: gain is $300,000 − $50,000 = $250,000. Because that is less than the $350,000 of depreciation taken, all $250,000 is recaptured as ordinary income under Section 1245.
Allocated $200,000 (below fair market value, with $100,000 more pushed into goodwill): gain on the trucks drops to $150,000, all ordinary, and goodwill rises by $100,000. The buyer loses $100,000 of fast depreciation and gains $100,000 of 15-year amortization.

The second version tempts sellers. It also understates the trucks below their fair market value, and the residual method requires assets in Classes I to VI to be allocated up to fair market value when the price covers it. A buyer who agrees to it gives up real deductions; an IRS examiner may simply reallocate.

Traps worth knowing

Seller financing and recapture timing

Most SBA-financed purchases include some seller financing. A seller note lets the seller report part of the gain on the installment method as payments come in. Publication 544 is clear that depreciation recapture under Sections 1245 and 1250 is ordinary income in the year of sale, even if no payment is received that year. A seller with heavy equipment recapture and a large note can owe tax before collecting the money. Sellers should model this before agreeing the equipment line. For the SBA rules on seller notes, see SBA seller financing requirements.

Consulting pay is not purchase price

A seller who stays on to help is paid for services. That's ordinary compensation income to the seller and deductible to the buyer as it's paid over the consulting period, which can look attractive to a buyer compared with 15-year goodwill. It has to be real pay for real work at a reasonable rate. On SBA change-of-ownership loans the seller can consult for up to 24 months, and the agreement sits outside the purchase price.

Related-party sales

If buyer and seller are related within the meaning of Section 1239, for example a seller selling to an entity they control, gain on depreciable property can be ordinary income rather than capital gain. Family and partner buyouts need a closer look.

C corporation sellers

When a C corporation sells its assets, the corporation pays tax on the gain, and shareholders pay again when the proceeds are distributed. The goodwill-versus-equipment split matters less at the corporate level, because a C corporation's capital gains aren't taxed at a lower rate than its ordinary income. That's one reason C corporation sellers prefer stock sales and buyers push back; see allocation of purchase price in a stock sale.

What's actually negotiable

Room to negotiate

Where in an appraised range the equipment value lands
Whether a customer list is valued separately or left in goodwill
The value of a non-compete, within what its terms support
Inventory valuation method, within IRS guidance
Who bears the cost of the valuation work

No real room

Allocating any Class I to VI asset above fair market value
Skipping classes or putting everything in goodwill
Treating consulting pay as purchase price, or the reverse
Filing a different allocation from the signed one
Ignoring later price adjustments

The cleanest approach: get credible values for the tangible assets and material intangibles first, agree the allocation on those values, and let goodwill take the residual. Then each side's adviser can model the result, and any give-and-take happens inside supportable ranges rather than over them. The mechanics are in asset purchase price allocation and the goodwill side in allocation of purchase price to goodwill. Rules summarized from IRS Publications 544 and 946 and the Code as of October 2026; tax law changes, especially first-year expensing, so confirm current rules with your adviser.

Common questions

Is a non-compete a good place to put price?

Usually not for either side. The buyer amortizes it over 15 years, the same as goodwill, while the seller generally reports it as ordinary income rather than capital gain. Value it at what the covenant is actually worth and no more.

Does a seller note delay the seller's tax?

Installment reporting can spread some gain over the years payments are received, but depreciation recapture is taxed as ordinary income in the year of sale even if no payment is received that year, according to IRS Publication 544.

Why do C corporation sellers care less about goodwill vs equipment?

A C corporation's capital gains are generally taxed at the same rate as its ordinary income, so the character split matters less to the corporation, though shareholders still face tax when proceeds are distributed. Sellers in this position sometimes explore personal goodwill, which needs careful support.

Can buyer and seller report different allocations?

Each files its own Form 8594, but if they agreed in writing the agreement generally binds both. Inconsistent filings are a common reason for IRS questions.

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.