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Owning a business has a major impact on how your taxes manifest each year, so it’s important the Internal Revenue Service is aware of any changes in your circumstances. According to section 1060 of the Internal Revenue Code, the IRS requires that you fill out and file Form 8594 when you’re buying or selling a business.

Understanding the Asset Acquisition Statement

Made up of many types of assets, including some tangible and others intangible, business transfers must be reported in detail by both parties involved in the process. There are seven asset classes listed on Form 8594, and how assets are identified has a considerable tax impact on buyers and sellers. As a result, it’s important to include allocation negotiations as part of your sales agreement. While the way items are allocated may vary from sale to sale, the IRS requires buyers and sellers to use a consistent treatment of the assets on the forms, which must be filed with their annual tax returns.

Form 8594 Asset Classes

The total selling price of a business is allocated into these seven classes of assets, and the assets must be allocated comparable to their fair market value. The fair market value is written in the first column, while the sales price for each class of assets is written in the adjacent column. We've outlined the different types of asset classes below:

Class I – Cash and General Deposit Accounts (checking and savings)

  • This does not include certificates of deposits.

    • Class II – Actively Traded Personal Property & Certificates of Deposit

  • This includes U.S. government securities, foreign currency, and stocks and securities.

    • Class III – Debt Instruments

  • This includes accounts receivable and other assets you mark to market at least annually.

    • Class IV – Inventory

  • This includes stock in trade of the taxpayer, property that would be included in inventory if on hand at the end of a tax year, and property held by a taxpayer primarily for sale to customers in the ordinary course of business.

    • Class V – Furniture, Fixtures, Vehicles, Land and Equipment

  • This also includes anything that doesn’t fall into another class.

    • Class VI – Section 197 Intangibles

  • This excludes goodwill and going concern (see Class VII). Examples include workforce in place and client lists.

    • Class VII – Goodwill and Going Concern Value

  • These include a good reputation and the ability of the company’s assets to generate a return on investment.

    • How to Fill Out Form 8594

    Complete Parts I and II for an original statement or Parts I and III for a Supplemental Statement. A Supplemental Statement is completed when there is a reallocation in consideration. Be sure to enter your name and taxpayer identification number (TIN) at the top of the form, check the box for purchaser or seller, and complete the rest of the form with utmost accuracy to make tax season a success.

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    This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.