Instructions for Form 8594, Asset Acquisition Statement

Form 8594, the Asset Acquisition Statement, is a tax document used by both the purchaser and seller when a group of assets that makes up a business is sold. Its function is to report the allocation of the total purchase price among the various assets transferred. This allocation is a significant step for tax purposes. For the buyer, it establishes the tax basis in the newly acquired assets, which affects future depreciation deductions. For the seller, it determines the amount and character of any taxable gain or loss on the sale.

A critical requirement is that both parties involved in the transaction must file their own Form 8594. The Internal Revenue Service (IRS) mandates that the purchase price allocations reported by the buyer and the seller must be identical. This consistency prevents discrepancies in tax treatment.

Determining if Filing is Required

Filing Form 8594 is mandatory when a transaction qualifies as an “applicable asset acquisition.” This transaction has two conditions. The first is that the group of assets being transferred must constitute a trade or business in the hands of either the seller or the buyer. The second condition is that the purchaser’s basis in the acquired assets is determined entirely by the amount paid for them.

A “trade or business” is defined broadly for this purpose. A key test is whether the nature of the assets is such that goodwill or going concern value could under any circumstances attach to them. Goodwill is the value of a business attributable to its reputation and customer loyalty, while going concern value is the added value of the assets due to their ability to operate and generate income. If the assets include elements like a customer base, business records, or operational processes, they likely constitute a trade or business.

For instance, purchasing a fully operational restaurant, including its name, recipes, and established customer list, is clearly the acquisition of a trade or business. The value of these intangible elements means goodwill is attached. In contrast, simply buying the kitchen equipment, tables, and chairs from a closed restaurant to use elsewhere would not require filing Form 8594, as no goodwill or going concern value is transferred with the physical items alone.

Information and Asset Allocation for the Form

Both parties must gather specific information. This includes the legal name, address, and taxpayer identification number (TIN) for both parties involved in the transaction. You will also need the exact date the sale occurred and the total consideration, which is the total amount the purchaser paid for the assets. This includes cash and the fair market value of other property or services exchanged.

The IRS requires that the total purchase price be allocated among the transferred assets using a specific methodology known as the “residual method” under Internal Revenue Code Section 1060. This method is sequential, meaning the price is first allocated to the most liquid assets and then down a list of defined asset classes. Any amount of the purchase price remaining after allocating to the first six classes is treated as a “residual” and assigned to the final class, which covers goodwill and going concern value.

The allocation must be distributed across seven distinct asset classes:

• Class I: Cash and general deposit accounts, such as checking and savings accounts.
• Class II: Actively traded personal property, certificates of deposit, and foreign currency.
• Class III: Assets like accounts receivable, mortgages, and credit card receivables that arise in the ordinary course of business.
• Class IV: The business’s inventory, stock in trade, or other property held primarily for sale to customers.
• Class V: A broad category for all assets not included in the other classes; this includes furniture, fixtures, machinery, equipment, buildings, and land.
• Class VI: Section 197 intangibles, with the specific exception of goodwill and going concern value. Examples include covenants not to compete, customer lists, franchises, trademarks, and patents.
• Class VII: Exclusively for goodwill and going concern value, which captures any premium paid above the fair market value of the other identifiable assets.

Filing Procedures and Post-Filing Actions

Form 8594 must be attached to the filer’s federal income tax return for the tax year in which the sale took place. This means it becomes part of the annual tax filing, whether that is a Form 1040 for an individual, Form 1120 for a corporation, or Form 1065 for a partnership.

Situations may arise where the allocation of the purchase price changes after the initial filing. This can happen if, for example, a contingency payment tied to the business’s future performance is made, increasing the total consideration. In such cases, the party affected by the change must file a supplemental Form 8594. This amended form should be attached to the income tax return for the year the change in consideration occurred, and it must provide a clear explanation for the adjustments to the original allocation.

Failure to file Form 8594 on time, or filing an incorrect form, can lead to penalties. The IRS also scrutinizes situations where the buyer and seller report different allocations for the same transaction. If the parties’ forms do not match, it can trigger an audit and potential penalties for both.