The IRS instructions are blunt: “Generally, both the purchaser and seller must file Form 8594” when a business is sold as a group of assets. Yet on small deals the purchase price allocation is often left until the tax return is due, long after the asset purchase agreement has been signed.
This guide is for buyers, sellers, CPAs and small valuation firms working on US asset acquisitions. It covers what Section 1060 asks for, how the seven asset classes work, when an appraisal makes sense, and how to keep both sides consistent.
What Is Tax-Basis Purchase Price Allocation?
When someone buys the assets of a trade or business rather than its shares, the total consideration has to be split across the individual assets acquired. This purchase price allocation sets the buyer’s tax basis in each asset, and that basis drives future depreciation and amortisation. For the seller, it determines how much of the gain is taxed as ordinary income and how much as capital gain.
Internal Revenue Code Section 1060 governs these “applicable asset acquisitions”. The Treasury regulation at §1.1060-1 requires buyer and seller to allocate consideration using the residual method in Treas. Reg. §§1.338-6 and 1.338-7, and the result is reported to the IRS on Form 8594, Asset Acquisition Statement, attached to each party’s income tax return for the year of the sale.
The tax-basis PPA is different from the purchase price allocation prepared for financial reporting under ASC 805, IFRS 3 or Ind AS 103. Those exercises measure fair value for the acquirer’s books and follow accounting standards. The tax allocation follows the Code and regulations. The two often share inputs, especially for intangibles, but they are separate deliverables with separate rules. (For the financial-reporting version, see our valuation under Ind AS page.)
The Seven Asset Classes on Form 8594
The residual method sorts every acquired asset into one of seven classes, as described in the IRS Instructions for Form 8594:
- Class I: cash and general deposit accounts (certificates of deposit are excluded).
- Class II: actively traded personal property, certificates of deposit and foreign currency, for example US government securities and publicly traded stock.
- Class III: assets marked to market at least annually, and debt instruments, including accounts receivable.
- Class IV: inventory and property held primarily for sale to customers.
- Class V: everything not in another class, for example furniture and fixtures, buildings, land, vehicles and equipment.
- Class VI: Section 197 intangibles other than goodwill and going concern value, such as workforce in place, customer- and supplier-based intangibles, licences, non-compete covenants, trademarks and trade names.
- Class VII: goodwill and going concern value.
How the residual method works
Consideration is first reduced by Class I assets. The remainder is allocated to Classes II through VI in order, up to each asset’s fair market value (pro rata within a class). Whatever is left falls into Class VII. The instructions are clear that no asset other than Class VII can receive more than its fair market value at the purchase date. If an asset could fit more than one class, it goes in the lower-numbered class.
In practice this means goodwill is a residual: it is whatever the buyer paid above the fair value of everything else. Get the identified intangibles wrong and goodwill absorbs the error.
Goodwill vs Identified Intangibles: Where the Judgement Sits
On most small business sales, Classes I to V are easy to support: cash is counted, receivables are aged, inventory is costed and equipment has a book or market value. The judgement in a purchase price allocation sits in Class VI.
Asset purchase agreements commonly name a customer list, a trade name, software, a non-compete or a key licence. Each of these is a Section 197 intangible, and the question is how much of the price each one carries before the residual lands in goodwill. Under Section 197, both Class VI intangibles and Class VII goodwill are generally amortised over 15 years for the buyer, so the buyer’s amortisation is often similar either way. The split still matters for the seller’s character of gain, for state tax, for consistency with the financial-reporting PPA, and for how well the file stands up if examined.
The usual valuation approaches apply. Income-based methods (relief-from-royalty for a trade name, multi-period excess earnings for customer relationships, with-and-without for a non-compete) are typical for material intangibles. Cost approaches can work for internally developed software or an assembled workforce. On a small deal the effort should match the amounts at stake. Our intangible asset valuations team works through these methods.
Do You Need a Full Appraisal for Form 8594?
No statute or regulation requires an independent appraisal for Form 8594. Section 1060 requires an allocation across the asset classes and an information return. It does not prescribe who must determine fair market value or how it must be documented.
That doesn’t make documentation optional. The allocation has to be supportable at fair market value, the IRS can challenge it, and the regulations include an example where the Commissioner disregards agreed values and reallocates the excess to goodwill. Proportionate support is the sensible standard.
A valuation assessment note is often enough when the deal is small, most of the value sits in tangible assets with observable values, and the identified intangibles are modest. A note sets out the allocation, the method for each class and the key assumptions, in a form a CPA can file and defend.
A full professional valuation report is more sensible when intangibles carry a large share of the price, when the parties have opposing tax interests, when the numbers feed a financial-reporting PPA, or when a lender, investor or later sale will scrutinise the file.
An example from our work
A US buyer and seller had signed the asset purchase agreement on a small deal, about US$500,000, but still needed the purchase price allocation schedule. FinVal advised them on the IRC §1060 requirements and on whether a full professional valuation or a valuation assessment note was appropriate for a deal of that size, valued the intangibles identified in the APA, and completed the PPA schedule for Form 8594. The client is not named, and the facts above are the only ones disclosed.
This is the kind of engagement our Valuation Support for Firms offering is built for: extra capacity for CPAs and valuation firms who own the client relationship and the filing.
Buyer–Seller Consistency: Agree Early, Agree in Writing
Buyers and sellers usually want different allocations. Buyers generally prefer value in faster-depreciating Class V assets. Sellers generally prefer value in capital-gain assets such as goodwill. The time to resolve this is in negotiation, not at year-end.
Section 1060(a) provides that if the parties agree in writing on the allocation or on any asset’s fair market value, “such agreement shall be binding on both the transferee and transferor”, unless the IRS determines it is not appropriate. Under Treas. Reg. §1.1060-1(c)(4), a party can generally escape a written allocation only with proof that would be admissible between the parties, such as mistake, undue influence, fraud or duress. The same paragraph states that nothing in it restricts the Commissioner’s authority to challenge the allocation. (26 CFR §1.1060-1)
A practical checklist for deal teams:
- Put an allocation schedule (or an agreed methodology) in the APA and refer to it from the purchase price clause.
- Match the figures on both Forms 8594. Mismatched filings are an easy flag for an examiner.
- Plan for adjustments. Earn-outs, escrows and working-capital true-ups change consideration. The instructions require a supplemental Form 8594 (Parts I and III) for the year an increase or decrease is taken into account.
- Keep the support file (valuation note or report, APA and closing statement) with the return.
- Line up the tax and book PPAs. Where a financial-reporting PPA exists, explain any differences rather than leaving them unexplained.
Our transaction advisory team can help structure the allocation discussion before signing.
How FinVal Can Support
Many small US firms don’t have a valuation specialist in-house for a one-off PPA. FinVal Research and Consultancy is a global valuation and advisory firm supporting global investors, advisors, founders and organizations in valuations, transaction advisory and fractional CFO services. We provide independent, well-documented valuation advice based on International Valuation Standards and on IRC §1060 and the Form 8594 rules that apply to buyers, sellers and their deal teams. We work with US CPA or tax advisers who remain responsible for filing the return. We supply the valuation analysis and the allocation schedule that sits behind it.
If you also handle cross-border equity work, our guide to 409A valuation vs Indian FMV covers the other common US–India valuation question.
This article is general information, not tax or legal advice. Confirm the treatment of any transaction with your US tax adviser.
Get Your Purchase Price Allocation Right the First Time
A purchase price allocation is quick to do badly and expensive to fix after both parties have filed. Agree it in writing, support it in proportion to the amounts involved, and make sure both Forms 8594 tell the same story.
If you’re a buyer, seller, CPA or valuation firm with a signed APA and an allocation still to prepare, book a free consultation or see how our valuation support for firms works.