What Is the 8594 Tax Form and Who Must File It?

When a business changes hands, the transaction involves a collection of assets, from equipment to customer lists, that must be valued. The Internal Revenue Service (IRS) requires a detailed accounting of this valuation through Form 8594, the Asset Acquisition Statement. This form provides a structured method for allocating the total purchase price across the various assets transferred. This reporting ensures that both the buyer and seller report the transaction consistently. This allocation is a mandatory part of the transaction’s tax consequences, influencing everything from the seller’s taxable gain to the buyer’s future depreciation deductions.

Who Must File Form 8594

The requirement to file Form 8594 is triggered by an “applicable asset acquisition.” This term refers to the transfer of a group of assets that constitutes an active trade or business in the hands of either the seller or the purchaser. A condition is that the buyer’s basis in the newly acquired assets is determined entirely by the purchase price. If you buy or sell a collection of assets that could operate as a business and goodwill or going-concern value could be part of the deal, filing is necessary.

For example, if a person purchases a fully operational restaurant, they are acquiring the stoves, tables, inventory, the business’s name, and its established customer base. This collection of assets is an applicable asset acquisition. The filing obligation applies regardless of whether the assets formed a business for the seller, as long as they could for the buyer. Both the buyer and seller must each file a separate Form 8594 with the IRS.

Understanding the Asset Classes and Allocation

The foundation of Form 8594 is the “residual method” of allocating the purchase price, a process governed by Section 1060 of the Internal Revenue Code. This method mandates a specific, sequential order for assigning value to the acquired assets. The purchase price is allocated to each of seven classes in order, up to the aggregate fair market value (FMV) of the assets within that class.

• Class I: Cash and general deposit accounts.
• Class II: Certificates of deposit, U.S. government securities, and other actively traded personal property.
• Class III: Assets that are marked-to-market annually for tax purposes and debt instruments, including accounts receivable.
• Class IV: Inventory and stock in trade held by the business for sale to customers.
• Class V: All assets not included in the other classes, a broad category that includes machinery, equipment, buildings, and land.
• Class VI: Specific intangible assets arising from the transaction, such as covenants not to compete and other similar arrangements.
• Class VII: Goodwill and going-concern value.

Any portion of the purchase price that remains after allocating value up to the FMV of the assets in the first six classes is the “residual” amount. This remainder is allocated entirely to Class VII assets. Goodwill represents the intangible value of a business’s reputation, while going-concern value is the worth derived from the assets being part of an operational enterprise.

Information and Completion of Form 8594

Before filling out Form 8594, both the buyer and seller must gather specific information. The form is divided into three parts. Part I, General Information, requires the details of the transaction, including the full names, addresses, and Taxpayer Identification Numbers (TINs) for both parties, as well as the sale date.

Part II, Original Statement of Assets Transferred, is where the financial details of the allocation are reported. You must enter the total purchase price and then, for each of the seven asset classes, list the aggregate fair market value and the final amount of the purchase price allocated to it. The sum of the allocated amounts must equal the total sales price. It is highly advisable for the buyer and seller to have a written agreement specifying this allocation to ensure both parties file consistent forms.

If the parties do not agree on the allocation, they must each file a form reflecting their own proposed numbers. Part III of the form is a Supplemental Statement and is only completed if there is an adjustment to the purchase price in a subsequent year. Any increase or decrease in price must be allocated by filing an amended form.

The Filing Process

Once Form 8594 is accurately completed, it must be submitted to the IRS. The form is not filed on its own; instead, it must be attached to the filer’s federal income tax return for the tax year in which the sale took place. For an individual, this means attaching it to their Form 1040, while business entities attach it to returns like 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 example, if a transaction occurs in March, both the buyer and seller will attach the completed Form 8594 to the tax returns they file for that year. Ensure it is included with the correct tax return to avoid potential penalties.

Tax Implications of the Allocation

The allocation reported on Form 8594 has direct tax consequences that differ for the buyer and the seller. For the seller, the allocation determines the character of the income or loss from the sale. For instance, amounts allocated to Class IV (inventory) or Class III (accounts receivable) will result in ordinary income, which is taxed at higher rates. In contrast, amounts allocated to Class VII (goodwill) or certain assets in Class V generate capital gains, which benefit from lower tax rates.

For the buyer, the allocation establishes the tax basis for each acquired asset, which is the amount from which future depreciation and amortization deductions are calculated. A higher allocation to assets with shorter recovery periods, such as equipment in Class V, allows the buyer to take larger deductions more quickly. An amount allocated to goodwill (Class VII) must be amortized over a 15-year period under Section 197 of the tax code.

This creates a natural tension in negotiations. A seller prefers a higher allocation to goodwill to maximize capital gains treatment. A buyer may prefer higher allocations to depreciable assets with shorter lives to accelerate tax deductions.