Instructions for Form 8594, Asset Acquisition Statement

When a group of assets that makes up a trade or business is sold, the buyer and seller must inform the Internal Revenue Service (IRS) how the total sales price was allocated among the various assets. This is accomplished using Form 8594, Asset Acquisition Statement Under Section 1060. The form provides the IRS with information on the buyer’s depreciable basis in the transferred assets and the seller’s calculated gain or loss. This allocation directly impacts tax liabilities, as the buyer’s allocation determines their basis for depreciation, while the seller’s allocation determines taxable gain or loss.

Determining Who Must File

The requirement to file Form 8594 is triggered by an “applicable asset acquisition.” This is defined as the transfer of a group of assets that constitutes a trade or business where the purchaser’s basis in the assets is determined wholly by the amount paid for them. Both the purchaser and the seller involved in such a transaction must each file their own separate Form 8594, attaching it to their federal income tax returns for the year the sale occurred.

A group of assets constitutes a trade or business if its character is such that goodwill or going concern value could under any circumstances attach to it. This filing requirement is met even if the sales agreement does not explicitly mention goodwill. Factors that indicate a trade or business include the presence of an active revenue stream or a collection of assets that could be operated by a buyer as a standalone enterprise.

Information and Asset Classification Needed for the Form

Before beginning Form 8594, both the buyer and seller must gather specific information. This includes the legal names and taxpayer identification numbers (TINs) for both parties, the exact date of the sale, and the total consideration paid. The total consideration is not just the cash exchanged; it also encompasses the fair market value (FMV) of any other property or assets the buyer transferred to the seller, plus any liabilities the buyer assumed as part of the deal.

The purchase price must be allocated across the seven asset classes defined by the IRS.

• Class I: Cash and general deposit accounts, such as checking and savings accounts.
• Class II: Certificates of deposit, U.S. government securities, and actively traded personal property.
• Class III: Accounts receivable, mortgages, and credit card receivables.
• Class IV: Inventory, stock in trade, or property held primarily for sale to customers in the ordinary course of business.
• Class V: All assets that do not fit into the other classes, which can include furniture, fixtures, buildings, land, vehicles, and equipment.
• Class VI: Section 197 intangibles, except for goodwill and going concern value. Examples include covenants not to compete, customer-based intangibles, and franchises, trademarks, and trade names.
• Class VII: Goodwill and going concern value.

Goodwill represents the value of a business’s reputation and customer relationships, while going concern value is the added value of an active, operational business compared to its individual assets. If an asset could be classified into more than one category, it should be placed in the lower-numbered class.

Step-by-Step Guide to Completing Form 8594

Part I, General Information, requires the basic details of the transaction. Here, you will enter the name and taxpayer identification number of the other party, the date of the sale, and the total sales price, referred to as the aggregate consideration.

Part II, Original Statement of Assets Transferred, is where the allocation occurs using the “residual method.” This method mandates allocating the purchase price sequentially across the seven asset classes. You begin by allocating the consideration to Class I assets based on their value, then to Class II, and so on through Class VI. The amount allocated to any asset in Classes I through VI cannot exceed its fair market value on the purchase date.

Within each class, if the remaining consideration is less than the total FMV of the assets in that class, you must allocate the consideration among the individual assets in proportion to their respective fair market values. Any consideration that remains after making allocations to Classes I through VI must be allocated to Class VII, which is goodwill and going concern value.

Part III of the form is a Supplemental Statement. This section is not completed at the time of the initial filing. It is used only if there is an increase or decrease in the consideration after the tax year of the purchase date. For example, if a contingency in the sales agreement is met, resulting in an additional payment, both parties would need to file a supplemental Form 8594 to report the change and reallocate the new total consideration.

Filing the Completed Form

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

The deadline for filing Form 8594 is the same as the due date for the income tax return to which it is attached, including any extensions. For instance, if a corporation obtains a six-month extension to file its Form 1120, the due date for the attached Form 8594 is also extended. Failure to file a correct Form 8594 can result in penalties under sections 6721 through 6724 of the Internal Revenue Code, unless you can show reasonable cause.

If an adjustment to the purchase price occurs in a later year, a supplemental Form 8594 must be filed. In this situation, the filer completes Parts I and III and attaches the updated form to the income tax return for the year in which the adjustment was made.