Form 8594 is the IRS statement both the buyer and the seller file to report how the purchase price of a business was allocated across seven asset classes. It is filed with the federal income tax return for the year of the sale, and the IRS matches the two filings.
The form looks like a post-close task. The tax result it records is set earlier, in the purchase agreement. This note covers who files, what the seven classes do, and when the form is due. The negotiation sits underneath that, because it is the part founders usually meet too late.
Who has to file Form 8594
Both parties file in an applicable asset acquisition under section 1060. That is a transfer of a group of assets that make up a trade or business, where the buyer's basis is determined by the price paid. It covers most asset sales in which the buyer has a say in the structure.
Each side reports the total consideration and how it was split across the seven classes. If the purchase agreement states the allocation in writing, both parties report that allocation, unless the IRS determines it does not reflect the facts. When the two forms do not match, both filings get examined.
The seven asset classes
The price is allocated in order, from Class I through Class VII. This is the residual method. Value goes to the earlier classes at fair market value. Whatever is left lands in goodwill.
- Class I is cash and general deposit accounts.
- Class II is actively traded personal property, including certificates of deposit and foreign currency.
- Class III is accounts receivable, other debt instruments, and assets the holder marks to market.
- Class IV is inventory.
- Class V is other tangible assets, including equipment, buildings, and land.
- Class VI is section 197 intangibles other than goodwill and going-concern value, including a covenant not to compete.
- Class VII is goodwill and going-concern value. It is the residual.
Classes I through IV
These classes are allocated first, at fair market value, because the values are mostly observable. Cash is cash. Traded securities have a market price. For both sides, value that lands here is largely tax-neutral. The buyer does not get a depreciation deduction, and the seller does not get a capital-gains advantage. That is why the IRS takes them off the table before either side can argue about the rest.
Class V
Tangible assets are allocated before intangibles and goodwill so the parties cannot inflate goodwill by understating equipment and property. For the buyer, Class V is useful. Those assets generally depreciate over 5 to 15 years. For the seller, proceeds allocated to assets that were already depreciated are recaptured at ordinary income rates. A seller who took section 179 or bonus depreciation may have little basis left, so each dollar allocated here is ordinary income.
Class VI
Section 197 intangibles are identifiable assets that are not the business as a whole. The buyer amortizes them over 15 years. The seller's treatment depends on the asset. A covenant not to compete is ordinary income, which is why it is one of the more contested lines in the allocation.
Class VII
Goodwill is what remains after the identifiable assets have taken their fair market value. The buyer amortizes it over 15 years, the same period as Class VI, so the buyer gains little by pushing value here instead of into identifiable intangibles. For the seller, goodwill is usually the best place for price to land. Proceeds are generally taxed at long-term capital gains rates.
When Form 8594 is due
Each party attaches Form 8594 to the federal income tax return for the tax year that includes the sale date. That includes a return filed on extension. There is no separate 30-day filing. The deadline is the return deadline for that year.
If the allocation changes after the year of the sale, the party files a supplemental Form 8594 with the return for the year of the change. The original filing does not get reopened by a side letter six months later unless that supplemental form goes in.
Where the buyer and the seller pull apart
The allocation that lowers the buyer's after-tax cost and the allocation that raises the seller's after-tax proceeds are rarely the same. That split is in the rules. It is not a posture.
Buyers want more value in Classes V and VI, because depreciation and amortization start after close. The difference between a 5-year life and a 15-year life on the same dollar is real money, and a buyer with tax counsel arrives with a schedule weighted that way.
Sellers with depreciated equipment, or with software written off under an accelerated method, have little basis left in those assets. Price allocated against them is recaptured as ordinary income. At the top federal rates, the spread between a 20 percent long-term capital gains rate and a 37 percent ordinary rate on $5 million of proceeds is $850,000, before state tax and the net investment income tax. Sellers who have not run that math before they sit down are negotiating without the number.
A seller who knows the basis in each class can ask for a price adjustment, or for more of the price in goodwill. A buyer who has modeled the same facts can push the other way. Neither move is available after the purchase agreement is signed. Signing without an allocation schedule attached is how that window closes.
Filing mistakes that undo the agreement
The two forms do not match
Both parties must report the same allocation. The IRS matches the forms. A mismatch often comes from an agreement that described the split in general terms and left the schedule for later, or from one side filing an internal estimate instead of the agreed schedule. The fix is an asset-by-asset schedule in the purchase agreement, with both sides agreeing to file it.
Intangibles in the wrong class
A customer relationship valued as if the contracts were not at-will, a non-compete parked in goodwill to reach Class VII, or a trademark number with no commercial history are positions that do not hold up. Classifications without an appraisal or comparable transactions are what examinations focus on. A cost segregation study has the same problem when the support is thin.
No valuation at the time of the sale
An allocation with no appraisal, especially where a large share sits in intangibles, is harder to defend. Work done at or before closing is the record. An appraisal built later, under exam, recovers less of that protection.
Do the work before the term sheet
The seller who has modeled depreciation recapture, the basis in each class, and a defensible goodwill number before a buyer conversation has a position a headline multiple does not provide.
Earlier choices narrow that range. A company that kept a clean entity structure, consistent depreciation positions, and a record of its intangibles has a simpler Form 8594 discussion than one with informal intercompany arrangements and basis that has already been written down. Those choices do not feel like deal terms when they are made. By the term sheet, they set the after-tax proceeds that are actually available. Year-end tax planning is one of the places that record gets built, or skipped.
PIF Advisory's tax practice works with founders on the allocation before a purchase agreement is signed, and on the filing after it. The useful version of that work uses the company's own basis and depreciation record, not a model assembled the week of signing.