Form 8594 Examples: A Walk-Through for Asset Sales

When a business is sold through an asset sale, both the buyer and seller must report the transaction to the Internal Revenue Service (IRS) using Form 8594, the Asset Acquisition Statement. The form’s function is to ensure both parties allocate the total purchase price to the various assets consistently. This allocation affects the buyer’s basis for depreciation and the seller’s calculation of gain or loss. The form must be filed with their income tax returns for the year the sale occurred, and it involves categorizing assets into specific classes.

Understanding the Asset Classes and Allocation Method

Form 8594 uses the “residual method” of allocation, a process mandated by Section 1060 of the Internal Revenue Code. This method requires allocating the total purchase price to transferred assets in a specific order. The price is first allocated to the most liquid assets, with any remaining “residue” allocated to intangible assets like goodwill. The amount allocated to any asset in Classes I through VI cannot exceed its Fair Market Value (FMV).

The IRS has established seven distinct asset classes for this purpose:

• Class I: Cash and general deposit accounts, such as checking and savings accounts.
• Class II: Actively traded personal property, including U.S. government securities, publicly traded stock, and certificates of deposit.
• Class III: Debt instruments like accounts receivable, and assets marked to market annually for federal income tax purposes.
• Class IV: The business’s inventory or stock in trade.
• Class V: All other tangible property not in other classes, which includes furniture, fixtures, machinery, equipment, and vehicles.
• Class VI: Section 197 intangibles, except for goodwill and going-concern value, such as customer lists, trademarks, and covenants not to compete.
• Class VII: Goodwill and the value of the business as a going concern.

Information Required to Complete Form 8594

Both the buyer and seller must gather several pieces of information. This includes the identifying information for both parties: their full name, current address, and Taxpayer Identification Number (TIN).

You will need the exact date the sale was finalized and the total consideration, or purchase price. This figure includes cash paid, the fair market value of any property transferred, liabilities the buyer assumes, and other relevant costs.

A comprehensive list of all transferred assets is necessary, along with their Fair Market Value (FMV) for assets in Classes II, III, IV, and V. FMV is the price property would sell for on the open market. You also need details of any related agreements that could affect the total consideration, such as employment contracts or covenants not to compete.

Example 1 Walk-Through of a Basic Asset Sale

Consider a hypothetical sale of a small bakery for a total purchase price of $250,000 on July 15. Both the buyer and seller have agreed on the allocation and will report identical figures on their respective Form 8594 filings, as consistency is a requirement.

The assets in the sale consist of $10,000 in a business checking account, $40,000 worth of inventory, and bakery equipment valued at $150,000. The buyer and seller agree the remaining value is attributable to goodwill. The purchase agreement outlines these assets and their Fair Market Values (FMV).

In Part I of Form 8594, “General Information,” both parties will enter the other’s name, address, and TIN. They will also list the date of the sale and the total consideration of $250,000.

In Part II, “Original Statement of Assets Transferred,” the allocation happens via the residual method. The $10,000 from the checking account is allocated to Class I, the $40,000 of inventory to Class IV, and the $150,000 of equipment to Class V. After allocating these assets, a total of $200,000 has been accounted for. The remaining $50,000 of the purchase price is the “residual” amount, which is allocated to Class VII as goodwill.

Example 2 Walk-Through of a Sale with Intangibles and a Supplemental Filing

Now, consider a more complex transaction involving the sale of a marketing agency for $1,000,000. The tangible assets have a combined Fair Market Value (FMV) that is significantly lower than the purchase price, creating a scenario with substantial intangible assets. The assets include accounts receivable of $50,000, computer equipment valued at $100,000, and a client list valued at $200,000. The seller also agrees to a covenant not to compete, valued at $150,000.

In Part II of Form 8594, the allocation begins. The $50,000 in accounts receivable is assigned to Class III. The $100,000 of computer equipment is allocated to Class V. The covenant not to compete ($150,000) and the client list ($200,000) are both Section 197 intangibles and are allocated to Class VI, for a total of $350,000 in that class.

So far, $500,000 of the purchase price has been allocated ($50,000 + $100,000 + $350,000). The remaining $500,000 of the $1,000,000 purchase price is the residual amount. This entire residual amount is allocated to Class VII as goodwill. This reflects the value of the agency’s brand reputation, established processes, and ongoing business value beyond its identifiable assets.

The transaction also includes a contingent payment clause: if the agency’s revenue exceeds a certain target in the year following the sale, the buyer will pay an additional $75,000 to the seller. The agency meets this target, and the payment is made. This change in consideration triggers the need for a supplemental filing. Both parties must file a new Form 8594 for the tax year in which this adjustment occurred.

On the new form, they will complete Part I as before and then proceed to Part III, “Supplemental Statement.” In this part, they will report the $75,000 increase in consideration. They must specify the reason for the change, which in this case is the contingent payment based on revenue targets. The additional $75,000 is allocated to the asset class where the original residual amount was placed, which is Class VII, goodwill. This increases the total allocation to goodwill from $500,000 to $575,000. They must also reference the tax year and form number of the original filing.