Section 1060 purchase price allocation: what the statute and regulations require
Short answer
Section 1060 of the Internal Revenue Code governs how the price is allocated when someone buys a group of assets that makes up a trade or business and the buyer's basis comes only from what was paid. Both sides must use the residual method in Treasury regulation 1.338-6: seven asset classes filled in order, each asset capped at fair market value, goodwill last. A written allocation agreed by buyer and seller generally binds both, and both report it on Form 8594.
Section 1060 is short. Almost all the working detail sits in two Treasury regulations: 1.1060-1, which says when the section applies and what the parties must do, and 1.338-6, which supplies the asset classes and the residual method. If you buy or sell the assets of an operating business in the US, these are the rules your tax return follows whether or not anyone mentions them by name. Here is what each piece says, with the citation so your adviser can check it. Nothing here is tax advice.
What the statute says
Section 1060(a) says that in an "applicable asset acquisition," the consideration is allocated among the assets the same way amounts are allocated under Section 338(b)(5), for both the buyer's basis and the seller's gain or loss. That cross-reference is how the stock-purchase allocation rules in the 338 regulations end up governing asset purchases. Since 1990 the subsection has also said that if buyer and seller agree in writing on the allocation of any consideration, or on the fair market value of any asset, that agreement binds both of them unless the IRS determines it isn't appropriate.
Section 1060(b) lets the IRS require information from both parties, which it does through Form 8594. Section 1060(e) adds a reporting rule for a 10-percent owner of an entity who transfers an interest in it and, in connection with that transfer, enters into an employment contract, covenant not to compete, royalty or lease agreement or similar agreement with the buyer.
When it applies: the "applicable asset acquisition"
Regulation 1.1060-1(b)(1) defines an applicable asset acquisition as any transfer, direct or indirect, of a group of assets that constitutes a trade or business in the hands of either the seller or the buyer, where the buyer's basis is determined wholly by reference to the buyer's consideration. A few points in that paragraph matter in practice:
- Seller's hands or buyer's hands. The regulation's first example is a buyer that acquires a machine shop's assets but doesn't continue the machine shop. Section 1060 still applies because the assets were a business in the seller's hands.
- Leased pieces count. In another example a sole proprietor sells a car wash's equipment and leases the building to the buyer. The assets sold together with the asset leased are a business, so the purchase is covered.
- Related transactions are combined. Under (b)(5), transfers from the same seller to the same buyer in a series of related transactions are aggregated, and all of the assets go into one residual-method allocation.
- More than one business. Under (b)(6), if the assets include more than one trade or business, they are all treated as a single trade or business for the allocation.
- Seller covenants. Under (b)(7), a covenant the seller enters into with the buyer in connection with the deal, such as a non-compete, is treated as an asset transferred as part of the business.
Whether goodwill "could under any circumstances attach" is a low bar. The Form 8594 instructions list factors: Section 197 or other intangibles present; a price above the book value of the non-goodwill assets on the buyer's books; or a licence, lease, non-compete, management or employment agreement between buyer and seller or the seller's people.
How to allocate: the residual method
Regulation 1.1060-1(c)(2) tells the seller to allocate its consideration using the residual method in 1.338-6 and 1.338-7, substituting consideration for "ADSP," and the buyer to do the same substituting consideration for "AGUB." Those acronyms are the 338 terms for the deemed sale price and the buyer's grossed-up basis; for an asset deal you can read both as "the price."
| Rule | Where | What it does |
|---|---|---|
| Class I first | 1.338-6(b)(1) | Consideration is reduced by cash and general deposit accounts |
| Class order | 1.338-6(b)(2)(i) | Then Classes II, III, IV, V and VI in order, pro rata by fair market value within each, then Class VII |
| Lower class wins | 1.338-6(b)(2)(i) | An asset that fits two classes goes in the lower-numbered one |
| FMV cap | 1.338-6(c)(1) | No asset other than Class VII gets more than its fair market value |
| Gross FMV | 1.338-6(a)(2)(i) | Fair market value is measured without reducing for mortgages, liens or other liabilities |
| Other limits | 1.338-6(c)(2) | Allocations are also subject to other Code provisions and general tax principles |
| Later changes | 1.338-7 | Increases and decreases in consideration are reallocated by class |
The class definitions themselves are spelled out in 1.338-6(b)(2) and repeated in the Form 8594 instructions. In short: II is actively traded personal property, certificates of deposit and foreign currency; III is receivables, other debt instruments and assets marked to market; IV is inventory; V is everything not in another class, including equipment, vehicles, furniture, buildings and land; VI is Section 197 intangibles other than goodwill and going concern value; VII is goodwill and going concern value. Worked numbers are in purchase price allocation examples.
What counts as consideration, and transaction costs
Under 1.1060-1(c)(1), the seller's consideration is its amount realized under Section 1001(b), and the buyer's is its cost of the assets that is properly taken into account in basis. The regulation's second example adds liabilities the buyer assumes to cash paid, giving total consideration of cash plus liabilities.
Paragraph (c)(3) deals with costs. Costs specifically tied to transferring one asset, the examples given are real estate transfer costs and security interest perfection costs, adjust that asset's allocation and the total consideration. General costs of the acquisition, such as non-specific appraisal or accounting fees, aren't assigned to an individual asset; they affect the allocation only through the total consideration.
Agreements between buyer and seller
This is the part with the most practical bite. Regulation 1.1060-1(c)(4) says a written agreement on the allocation of any consideration, or on the fair market value of any asset, is binding on the parties. It also says nothing in it restricts the IRS's authority to challenge the agreed figures. And it says a party can escape the agreement only by meeting the standard in Commissioner v. Danielson, which the regulation describes as offering proof that, in an action between the parties, would be admissible to alter the agreement or show it is unenforceable because of mistake, undue influence, fraud, duress and similar grounds.
So a buyer who signs a schedule putting $40,000 on a non-compete can't later decide on their return that the non-compete was worth $5,000 and the difference was goodwill. That is why the schedule deserves real attention before signing; see purchase price allocation schedule.
Reporting
Regulation 1.1060-1(e) and the Form 8594 instructions require both buyer and seller to attach Form 8594 to their returns for the year of the sale, and to file a supplemental statement for any later year in which the consideration changes. The form asks for class totals (Classes VI and VII combined), whether the parties agreed an allocation in a signed writing, and whether there were related agreements such as a non-compete, lease or employment contract, with the maximum consideration under them. Penalties may apply for failing to file a correct form without reasonable cause. Line-by-line help is in Form 8594 explained.
Exceptions and edge cases
| Situation | Treatment under the rules |
|---|---|
| Like-kind exchange of a business under Section 1031 | Form 8594 not required, except for the part of the group Section 1031 doesn't cover; 1.1060-1(b)(8) handles partial non-recognition |
| Transfer of a partnership interest | Generally not Form 8594; but a purchase of a partnership interest treated as a purchase of partnership assets that are a business is subject to Section 1060 and the buyer files |
| Purchase of corporate stock | No new asset basis, so no Section 1060 allocation, unless an election treats the deal as an asset purchase; see allocation in a stock sale |
| Controlled foreign corporation is buyer or seller | Each US shareholder attaches Form 8594 to its Form 5471, per the instructions |
Where small deals go wrong under Section 1060
- Treating the deal as "just goodwill" and skipping the class-by-class allocation.
- Agreeing an allocation in the purchase agreement, then filing a different one.
- Valuing equipment above its fair market value to speed up the buyer's deductions.
- Forgetting that assumed liabilities are part of the consideration.
- Putting seller consulting pay in the purchase price instead of treating it as compensation.
- Missing the supplemental Form 8594 after a rebate or true-up.
For the bigger picture, including the book allocation under ASC 805 and how the allocation relates to an SBA loan file, start with the purchase price allocation guide. Statute and regulations checked on Cornell LII and the eCFR as of October 2026; confirm your own position with your tax adviser.
Common questions
Does Section 1060 apply to a stock purchase?
Not to an ordinary purchase of corporate stock, because the buyer's basis in the company's assets doesn't change. It can apply when an election treats a stock deal as an asset purchase, which has its own reporting, and to certain partnership interest purchases treated as asset purchases.
Can the IRS override an allocation the parties agreed?
Yes. The statute makes a written agreement binding on buyer and seller unless the IRS determines the allocation or value is not appropriate. The regulations add that nothing restricts the IRS's authority to challenge agreed allocations.
What counts as a trade or business under Section 1060?
A group of assets is a trade or business if goodwill or going concern value could under any circumstances attach to it, or if its use would be an active trade or business under Section 355. A sale of most operating small businesses meets that test.
Is a non-compete part of the Section 1060 allocation?
Yes. The regulations treat a covenant the seller enters into with the buyer in connection with the acquisition, such as a non-compete, as an asset transferred as part of the trade or business. It is a Class VI asset.
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.