Dividing Up the Purchase Price: IRS Form 8594 for Business Buyers

Quick answer: When you buy a group of assets that makes up a trade or business, and goodwill or going concern value attaches or could attach, both buyer and seller generally must report the sale to the IRS on Form 8594. The form shows how the purchase price was allocated across seven classes of assets. You attach it to your income tax return for the year of the sale. The form asks whether you and the seller agreed on that allocation in writing, so the conversation belongs before you sign, not at tax time.

I’m a lawyer, not your tax preparer, so this one is a team sport. Your accountant owns the tax result. My job is making sure the contract says what you and your accountant actually decided. But every boss buying a business should understand this form, because the number you agree to as one big price gets split into pieces, and the pieces have consequences.

What is Form 8594 for?

The IRS says the form is used by both the seller and the purchaser of a group of assets that makes up a trade or business, if goodwill or going concern value attaches, or could attach, to those assets, and if the purchaser’s basis in the assets is determined only by the amount paid.

The instructions explain why an allocation is needed at all: it determines the purchaser’s basis in each acquired asset and the seller’s gain or loss on the transfer of each asset. Same deal, two taxpayers, one set of numbers.

When does a group of assets count as a trade or business?

The instructions say a group of assets makes up a trade or business if goodwill or going concern value could under any circumstances attach to them. Factors to consider include:

• the presence of any Section 197 or other intangible assets;
• any excess of the total paid over the book value of the assets, other than goodwill or going concern value; and
• a license, a lease agreement, a covenant not to compete, a management contract, an employment contract or similar agreements between purchaser and seller.

Look at that last one. The lease, the seller’s promise not to compete and the employment agreements all show up in the analysis.

What are the seven asset classes?

Class	What the instructions put there
Class I	Cash and general deposit accounts
Class II	Actively traded personal property, certificates of deposit, foreign currency
Class III	Assets marked to market at least annually, and debt instruments including accounts receivable
Class IV	Stock in trade and inventory
Class V	All other assets, generally including furniture and fixtures, buildings, land, vehicles and equipment
Class VI	Section 197 intangibles other than goodwill: customer-based intangibles, licenses and permits, covenants not to compete, trademarks and trade names
Class VII	Goodwill and going concern value

The price is allocated in order. Reduce the consideration by the Class I assets, then allocate what remains to Class II, then III, IV, V and VI, in proportion to fair market value within each class, and what’s left goes to Class VII. The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date.

Why should a buyer care how the price is split?

Because the IRS instructions say the allocation determines your basis in each asset. Your accountant can explain what that means for your specific deal. As for me, I care because Line 5 of the form asks whether the purchaser and seller provided for an allocation of the sales price in the sales contract or in another written document signed by both parties, and if so, whether the fair market values listed for each class are the amounts agreed on.

Translation: the IRS is going to ask whether you two agreed on this in writing. Decide on the front end whether you want that in the deal, and if you do, put it in clearly. That’s what strong business contracts are for.

Line 6 is also worth knowing. It asks whether the purchaser also purchased a license or a covenant not to compete, or entered into a lease agreement, employment contract, management contract or similar arrangement with the seller, or with the seller’s managers, directors, owners or employees. The instructions say to figure the maximum consideration to be paid by assuming any contingencies in the agreement are met and that the consideration paid is the highest amount possible. So those side agreements belong on your checklist before you sign.

What if the price changes later?

If the amount allocated to any asset goes up or down after the year of the sale, the seller or purchaser, 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 instructions list penalties for not filing a correct form by the due date of your return if you cannot show reasonable cause, citing Sections 6721 through 6724.

Does this apply to every purchase?

No. The instructions list exceptions, including a like-kind exchange under Section 1031 and a transferred partnership interest, and they note separate treatment when a partnership interest purchase is treated as a purchase of assets. If you’re buying stock or membership interests rather than assets, ask your accountant whether the form applies. How your deal is structured is one of the first things to pin down, and it connects directly to the rest of the legal work on your purchase.

Your trademark may be in Class VI, but owning it is a separate step. Read does the brand come with the business.

Why talk to the Bosses’ Lawyer about this?

Because the allocation is a business decision that ends up in a legal document. I’ll work alongside your accountant so the contract reflects what you decided, in language you understand. I’m a Chicago attorney licensed in Illinois. Book a discovery call or call 866-217-3432.