Form 8594 Explained: How Purchase Price Allocation Works When You Sell a Business?
Under IRS guidance, Form 8594 is the form buyers and sellers generally file when a group of assets that make up a trade or business is sold and goodwill or going concern value could attach to the assets. The IRS requires both parties to use the residual method for the purchase price allocation, which assigns the price to seven asset classes in order, with goodwill and going concern value receiving the amount that remains.
This article explains how Form 8594 works for owners who are thinking about selling a law practice or a construction company. It covers the IRS definitions of the seven classes, how the sale of a business tax treatment works asset by asset, how an asset sale vs stock sale affects the deal, and what records to gather first. It covers federal rules only and does not address California rules.
Reviewed against current IRS guidance: October 20, 2026.
What Form 8594 Is and Who Must File?
Form 8594, the Asset Acquisition Statement Under Section 1060, is the form buyers and sellers use to report the sale of a group of assets that make up a business when the transaction involves goodwill or going concern value. The Form 8594 instructions state that, generally, both the purchaser and the seller must file the form.
According to the IRS, the requirement applies when a group of assets that make up a trade or business is transferred and the purchaser's basis in the assets is determined wholly by the amount paid. A group of assets is treated as a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets.
For the IRS explanation, see About Form 8594 and the Instructions for Form 8594.
How the Sale of a Business Is Taxed: Asset by Asset
Selling a business taxes are determined asset by asset, not as one lump sum. The IRS states that a sale of a business is usually treated as a sale of each asset, with each asset treated as being sold separately for determining gain or loss. Each asset must be classified as a capital asset, depreciable or real property used in the business, or property held for sale to customers. Understanding selling a business taxes asset by asset is the starting point for any owner planning an exit.
The IRS describes the sale of a business tax treatment for each type of asset:
Capital assets: the sale results in capital gain or loss.
Depreciable and real property used in the business: property held longer than one year produces a Section 1231 gain or loss.
Inventory: the sale results in ordinary income or loss.
Because the sale of a business tax treatment depends on how each asset is classified, the amount of the price assigned to each asset matters to both sides of the deal. That is the reason the IRS requires an allocation.
For the IRS explanation, see Sale of a business.
The Residual Method: How the Purchase Price Is Allocated?
The IRS states that both the buyer and the seller must use the residual method to allocate the consideration among the business assets, except for assets in nontaxable exchanges. The residual method also determines the buyer's basis and how much of the price goes to goodwill and certain other intangibles. For Form 8594 purchase price allocation, the Form 8594 instructions describe the order in sequence:
The consideration is first reduced by the Class I assets, which are cash and general deposit accounts.
The remaining consideration is then allocated to the assets in Classes II through VI, in order.
Any amount left over is allocated to Class VII, goodwill and going concern value.
The residual method gets its name from that last step: goodwill and going concern value receive what is left after the other classes. A seller preparing for a sale should therefore expect the purchase price allocation to follow this order.
Form 8594 Asset Classes I Through VII
The Form 8594 instructions group a business's assets into seven classes. The table below summarizes the IRS definitions.
Class | What the IRS instructions say it covers |
Class I | Cash and general deposit accounts, other than certificates of deposit held in banks and similar institutions |
Class II | Actively traded personal property, plus certificates of deposit and foreign currency |
Class III | Assets the taxpayer marks to market at least annually, and debt instruments, including accounts receivable |
Class IV | Stock in trade of the taxpayer and other inventory-type property |
Class V | All assets other than Class I, II, III, IV, VI, and VII assets |
Class VI | All Section 197 intangibles except goodwill and going concern value |
Class VII | Goodwill and going concern value |
A seller can use this table to map each item on the balance sheet to a class before the Form 8594 instructions are applied. The classification of each asset still depends on its facts, so the allocation should be reviewed with a tax professional.
Goodwill and Going Concern Value: Class VII and Class VI
For many law practices and construction companies, the value of the business is not limited to equipment and receivables. Goodwill and going concern value are placed in Class VII, and they receive the amount left after the other classes under the residual method.
The Form 8594 instructions also address a covenant not to compete. The IRS states that a covenant not to compete entered into in connection with the acquisition of an interest in a trade or business is a Class VI asset, and that it is also listed as a factor that may indicate goodwill could attach. Any non-compete terms in a sale agreement should therefore be reviewed together with the allocation.
Plan Your Sale With Confidence
Tax Wealth Consultant (TWC) provides bookkeeping and tax-planning services for law firms and construction businesses in Irvine and Orange County. Schedule a consultation to review how your records and tax planning line up before a sale.
taxwealthconsultant.com | (949) 409-8335
Asset Sale vs. Stock Sale: Selling an Ownership Interest
Not every sale is a sale of assets. The IRS states that an interest in a partnership or joint venture is treated as a capital asset when sold, and that gain or loss from unrealized receivables or inventory items is ordinary. For corporations, the IRS states that stock sales usually produce capital gain or loss.
The asset sale vs stock sale question therefore matters, because the form of the transaction affects how the gain is treated. The IRS page on the sale of a business also explains that corporate liquidations are generally treated as sales or exchanges, and that the corporation recognizes gain or loss as if it sold its assets at fair market value.
Form 8594 applies when a group of assets that make up a business is transferred and the buyer's basis is determined wholly by the amount paid. Whether Form 8594 is required for a particular deal depends on how the deal is structured, so the structure should be reviewed with a tax professional before an agreement is signed.
When the Price Changes After Closing: Part III of Form 8594
The purchase price in a business sale can change after the closing date. The Form 8594 instructions state that a taxpayer must complete Part III and file a new Form 8594 for each year that an increase or decrease in consideration occurs.
Sellers and buyers who agree to price adjustments, earn-outs, or other later changes should keep a record of each change and the date it occurred, because the instructions tie the supplemental filing to each year in which consideration changes.
Filing Form 8594 With the Tax Return
According to the Form 8594 instructions, you generally attach Form 8594 to your income tax return for the year in which the sale date occurred. Because both the buyer and the seller generally file, each party attaches its own form to its own return.
Taxpayers should confirm that they are using the current Form 8594 and instructions from the IRS before filing.
Sell a Law Practice Taxes and Sell a Construction Company Taxes: Records to Gather
The allocation depends on records. Anyone planning to sell a law practice or sell a construction company should be able to list the business's assets by type: cash, receivables, inventory-type property, equipment, intangibles, and goodwill. The classes in the Form 8594 instructions give a framework for sorting that list.
Sell a law practice taxes and sell a construction company taxes both start with the same step: current books that tie each asset to a balance sheet account and a cost. Professional responsibility rules that apply to the sale of a law practice are outside the scope of this tax article and should be reviewed with the appropriate professionals.
Why Bookkeeping and Tax Planning Matter Before a Sale?
Form 8594 is filed with the return, but the numbers behind it come from the books. Accurate bookkeeping lets an owner see what each asset cost, what receivables are outstanding, and what the business holds on its balance sheet before the price is negotiated.
Tax planning before a sale can also include reviewing how the transaction is structured and how the gain will be treated. Selling a business taxes are fact-specific, and the same is true of an asset sale vs stock sale, so owners should discuss their situation with a tax professional early.
Tax Wealth Consultant (TWC) offers bookkeeping services and tax planning for business owners. For related reading, see the TWC articles on installment sales and Section 453 and QSBS and Section 1202. More articles are available at https://www.taxwealthconsultant.com/.
Next Steps for Business Owners in Irvine and Orange County
For sell a law practice taxes and sell a construction company taxes alike, owners in Irvine and Orange County should start with current books, a clear list of assets, and a conversation about how the deal will be structured. A tax advisor can help evaluate how the rules apply to specific facts, and TWC can review how a business's books and tax planning line up before a purchase price is negotiated.
Talk With Tax Wealth Consultant
Tax Wealth Consultant (TWC) provides bookkeeping and tax-planning services for law firms and construction businesses in Irvine and Orange County. Schedule a consultation to review how your records and tax planning line up before a sale.
taxwealthconsultant.com | (949) 409-8335
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