Form 8594: Reporting Asset Acquisition
When a business is bought or sold as an asset acquisition under Internal Revenue Code Section 1060, IRS Form 8594, Asset Acquisition Statement Under Section 1060, is required. Both the buyer and the seller of the business must submit this form with their respective tax returns. Participants should familiarize themselves with asset allocation, as it directly affects both depreciation and amortization for the buyer, and capital gains and ordinary income for the seller.
The buyer's depreciation and amortization expenses are directly affected by asset allocation, which establishes the tax basis for individual assets. This allows the buyer to maximize tax deductions by front-loading the purchase price to other assets with shorter useful lives. For the seller, asset allocation affects capital gains and ordinary income because the IRS requires the total purchase price of a business to be allocated among individual assets, each taxed differently.
Buyers and sellers can use this guide to learn everything they need to know about reporting asset acquisitions on IRS Form 8594.
Key Takeaways
IRS Form 8594 is required to report the sale of a business.
Both the buyer and the seller must submit this form to the IRS.
The buyer and seller will attach this form to their respective tax returns and submit it by the appropriate deadline.
Asset allocation affects taxes because different asset classes generate different types of income taxed at different rates.
Mismatched allocations between buyer and seller may trigger an IRS audit notice.
Understanding the Asset Acquisition Statement
Made up of many types of assets, both intangible and tangible property, business transfers must be reported in detail by both parties involved to ensure accurate tax reporting. 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 in your sales agreement. IRS Form 8594 is designed to ensure compliance with Internal Revenue Code Section 1060 and is used only for specific transactions. Asset sales involve a business purchase that exempts buyers from associated liabilities, while stock sales include both the asset and any related liabilities.
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.
Example Scenario
The Tech Corporation is buying assets to open a new office cafe from Cafe Joe Inc., which will retain the legal entity, but is selling equipment for $100,000. The purchase price must be allocated to classes on IRS Form 8594.
Asset Class | Type | Value Allocated |
Class I | Cash and Deposits | $5,000 |
Class III | Accounts Receivable | $10,000 |
Class IV | Inventory | $15,000 |
Class V | Equipment and Furniture | $50,000 |
Class VII | Goodwill and Licenses | $20,000 |
Total | Purchase Price | $100,000 |
When Is Form 8594 Required?
There are scenarios where Form 8594 is required (applicable asset acquisitions) and others where it is not.
Required:
A business sale or purchase (not a stock sale).
Goodwill or "going concern value" for the transferred assets.
Multiple asset classes or types are involved, including inventory and equipment.
Not Required:
Stock transactions (unless the stock is treated as an asset for federal income tax purposes).
Like-kind exchanges.
No goodwill or "going concern value" is involved in the purchase.
Form 8594 Asset Classes Explained
The total selling price of a business is allocated among seven asset classes, and the assets must be allocated in proportion 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 Form 8594 classes below:
Class I: Cash and deposit accounts
Class I assets include cash and balances in savings and checking accounts (liquid assets), but exclude certificates of deposit.
Class II: Marketable securities
Class II assets cover certificates of deposit, foreign currency, and actively traded securities, including U.S. government securities and publicly traded stocks.
Class III: Accounts receivable and debt instruments
Class III assets include accounts receivable and mortgages. It also includes credit card receivables arising in the ordinary course of business, including unpaid invoices or notes receivable.
Class IV: Inventory
Class IV assets encompass stock in trade, property included in inventory, or property that is held for sale to customers, such as raw materials.
Class V: Tangible personal property (equipment, vehicles, furniture, land)
Class V assets include anything that doesn’t fall into another class, including tangible assets like furniture, land, equipment, machinery, vehicles, and other actively traded personal property.
Class VI: Section 197 Intangibles (excluding goodwill)
Class VI assets exclude "goodwill and going concern" – more on that below (see Class VII assets). This class covers intangible assets, including customer lists, trademarks, patents, and franchise rights.
Class VII: Goodwill and going concern value
The final class includes a good reputation, brand recognition, and the ability of the business’s assets to generate a return on investment. It is the residual value assigned after the six other classes have been allocated their fair market value.
Buyer vs. Seller Tax Implications
Allocations benefit buyers and sellers differently. Sellers typically seek to minimize their tax burden by maximizing the allocation to assets taxed at lower long-term capital gains rates rather than at higher ordinary income rates. Buyers typically allocate more to assets that allow faster depreciation or amortization, reducing their short-term taxable income.
Allocations that benefit a seller tend to work against a buyer, and vice versa, underscoring the importance of allocation negotiations in a sale. For example, negotiations could result in higher goodwill for the seller and a reasonable equipment valuation for the buyer. Regardless of the results, the IRS requires both the buyer and seller to use the exact allocation figures on their individual income tax returns to ensure the best tax outcomes.
How to Fill Out Form 8594
Complete Parts I and II of IRS Form 8594 for an Original Statement or Parts I and III for a Supplemental Statement. File your Original Statement with your income tax return for the year in which the sale date occurred. File your Supplemental Statement for any year in which there is an increase or decrease in the purchase price after the year of the original sale.
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 accurately. If there are discrepancies between your form and the seller or buyer, it will trigger additional IRS scrutiny.
While both the seller and buyer are responsible for submitting this form, they will approach it differently. For example, in Part II, the buyer reports how they allocated the total purchase price among the assets, while the seller reports which assets were sold and the amounts realized.
Common Mistakes to Avoid
Sellers and buyers need to avoid these common mistakes when preparing IRS Form 8594, including:
Buyer and seller allocation numbers that don't match
Substandard or unrealistic asset valuations
Failing to file a Supplemental Statement when allocations change
Forgetting to consult or coordinate with a tax advisor
The consequences of these mistakes can be severe and can result in an IRS audit notice.
How 1-800Accountant Can Help
Whether you're the purchaser or seller, it's essential to accurately prepare IRS Form 8594 while avoiding pitfalls that can attract IRS scrutiny. When you trust 1-800Accountant, America's leading virtual accounting firm, with your financial work, your form is prepared, and your business is supported by:
Regular transaction assistance
Tax advisory throughout the tax year
Full-service bookkeeping and asset tracking
Year-round support and coordination between your tax and bookkeeping teams ensures the best results for your business.
Schedule a quick consultation – usually 30 minutes or less – to learn how asset allocation, compliance, and advisory services will keep your operations moving forward.
FAQs About Form 8594
Who files Form 8594?
When it comes to Form 8594, both the seller and buyer are responsible for tax filings. This form is required as a result of an asset sale or business trade. The buyer and seller must have identical allocation numbers to satisfy IRS requirements.
Do both buyer and seller file the form?
Yes, both the buyer and seller will submit this form. Once IRS Form 8594 is prepared, they will submit it with their income tax returns by the appropriate deadline. Failing to submit this form may result in additional IRS scrutiny.
What happens if allocations don’t match?
It is important that the allocations listed by the seller and buyer match. A mismatch might result in an IRS audit. If you have concerns about incorrect or mismatched allocations, contact the buyer or seller and seek professional tax advice.
Is Form 8594 filed separately or with a tax return?
IRS Form 8594 is not a standalone form. Accordingly, it must be submitted with the buyer's and seller's respective income tax returns for the year in which the business sale occurred. The form used for your income tax return depends on your business entity selection.
Can Form 8594 be amended?
Yes, Form 8594 can be amended. If there's a change to the purchase price allocation after the original form is filed, file an amended return and complete Part III. This is known as a Supplemental Statement.
How does goodwill get taxed?
Goodwill is typically taxed as a capital gain. Sellers want to minimize their tax burden. By maximizing the allocation to assets taxed at lower long-term capital gains rates, they avoid higher ordinary income rates.
Does Form 8594 affect future depreciation?
Yes, Form 8594 affects future depreciation. Future depreciation determines the tax basis of the acquired assets, which in turn determines how much and how quickly a buyer can write off the purchase price over time.