Form 8594, Asset Acquisition Statement Under Section 1060, reports how the price of a business sold as a group of assets is allocated among seven classes of assets. Both the buyer and the seller generally file it with their tax returns for the year of the sale.

Who has to file Form 8594?

Both the purchaser and the seller, when a group of assets that makes up a trade or business is transferred and the buyer's basis is determined only by the amount paid. It is not required for a like-kind exchange under §1031 or for a transfer of a partnership interest.

What are the Form 8594 asset classes?

Class I cash, Class II actively traded property and CDs, Class III accounts receivable and assets marked to market, Class IV inventory, Class V all other assets such as equipment, buildings and land, Class VI section 197 intangibles other than goodwill, and Class VII goodwill and going concern value.

Do buyer and seller have to agree on the allocation?

They do not have to, but if they agree in writing, the agreement generally binds both of them under §1060(a) unless the IRS finds it inappropriate. Line 5 asks whether such an agreement exists.

When do I file a supplemental Form 8594?

When the consideration increases or decreases after the year of sale, for example from an earnout or a price adjustment. You complete Parts I and III and attach it to the return for the year the change is taken into account.

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Form 8594 Instructions: Asset Classes and Purchase Price Allocation

By Hans Goldstein · Updated 2026-09-27

Form 8594 is the form that tells the IRS how the price of a business was split among its assets. When a business is sold as a group of assets, both the buyer and the seller generally attach Form 8594 to their returns for the year of sale, allocating the price across seven asset classes using the residual method of §1060. The allocation decides how much of the seller's gain is ordinary income, how much is capital gain, and how much can be deferred on an installment note.

This page walks through who files, the classes, the allocation order, and how the allocation interacts with seller financing. For the broader tax picture on selling a company, see selling a business: tax implications.

Who must file Form 8594

From the IRS instructions (Rev. November 2021, still current):

Both parties file when there is "a transfer of a group of assets that makes up a trade or business" and the buyer's basis "is determined wholly by the amount paid for the assets." It does not matter whether the assets are a business in the seller's hands, the buyer's, or both.
A trade or business exists if goodwill or going concern value "could under any circumstances attach." Signs include section 197 intangibles, a price above book value, or side agreements such as a covenant not to compete or employment contract.
Exceptions: a group of assets exchanged in a §1031 like-kind exchange (Form 8594 is still required for any part not covered by §1031), and a transfer of a partnership interest (see Reg. §1.755-1(d)). A purchase of a partnership interest treated as a purchase of partnership assets can still be subject to §1060, with the purchaser filing.
A stock sale is not an asset sale and generally does not use Form 8594, unless it is treated as an asset sale (for example under a §338(h)(10) or §336(e) election, which have their own forms).

Attach it to the income tax return (Form 1040, 1041, 1065, 1120, 1120-S) for the year the sale occurred. Penalties under §§6721 to 6724 can apply if a correct form is not filed without reasonable cause.

The seven asset classes

Class	What it includes	Typical seller tax character
I	Cash and general deposit accounts (not CDs)	None
II	Actively traded personal property, CDs, foreign currency, U.S. government securities, publicly traded stock	Capital, usually small
III	Accounts receivable and other debt instruments; assets marked to market at least annually	Ordinary for a cash-basis seller with zero basis
IV	Inventory and property held primarily for sale to customers	Ordinary
V	Everything not in another class: furniture, fixtures, equipment, vehicles, buildings, land	§1245 or §1250 recapture, then §1231
VI	Section 197 intangibles other than goodwill: covenants not to compete, customer lists, licenses, permits, trademarks, workforce in place, know-how	Mixed; a covenant not to compete is ordinary income to the seller
VII	Goodwill and going concern value	Usually capital gain

If an asset could fit in more than one class, use the lower-numbered class.

How the residual method allocates the price

The instructions apply the residual method of Reg. §§1.338-6 and 1.338-7:

Reduce the total consideration by the Class I cash transferred.
Allocate what is left to Class II, then III, IV, V and VI, in that order, up to each asset's fair market value. Within a class, allocate in proportion to fair market values.
Whatever remains goes to Class VII, goodwill and going concern value.

No asset other than Class VII can be allocated more than its fair market value. That is why goodwill is "the residual": it absorbs any premium the buyer pays above the identifiable assets.

Written agreements bind. Under §1060(a), if buyer and seller agree in writing on the allocation or on any asset's fair market value, the agreement is binding on both unless the IRS determines it is not appropriate. Line 5 of the form asks about this. Negotiate the allocation in the purchase agreement, not after closing, because the two sides want opposite things: the seller wants more in goodwill (capital gain), the buyer wants more in equipment and inventory (faster deductions).

Line-by-line: filling out Form 8594

Part I, General Information. - Line 1: the other party's name, address and taxpayer ID (SSN or EIN). It is required. - Line 2: date of sale. - Line 3: total sales price (consideration). For the seller this is the amount realized; for the buyer, the cost of the assets. Do not include stated or imputed interest on a note.

Part II, Original Statement. - Line 4: for each class, the aggregate fair market value and the allocation of the sales price. Classes VI and VII are reported together. - Line 5: whether the contract or another signed document provides an allocation, and whether the fair market values listed match it. - Line 6: whether the buyer also got a license, covenant not to compete, lease, employment or management contract with the seller or its owners. If yes, attach a statement with the type of agreement and the maximum consideration, not including interest. To find the maximum, assume all contingencies in the agreement are met.

Part III, Supplemental Statement. Only for later changes. See below.

Simple example: allocation on a seller-financed sale

Simple example. A sole proprietor sells a service business for $2,000,000 with 30% ($600,000) down and a note for the rest at an adequate interest rate. Fair market values and the seller's tax basis:

Class	Asset	Allocation	Seller basis	Gain	Character	Can it be reported on the installment method?
I	Cash	$50,000	$50,000	$0	n/a	n/a
III	Accounts receivable (cash-basis seller)	$150,000	$0	$150,000	Ordinary	Ask your CPA; receivables are ordinary income items
IV	Inventory	$200,000	$160,000	$40,000	Ordinary	No. Inventory is excluded (§453(b)(2)(B))
V	Equipment (cost $500,000, depreciated to $100,000)	$300,000	$100,000	$200,000	§1245 recapture	No. Recapture is recognized in the year of sale (§453(i))
VI	Covenant not to compete	$100,000	$0	$100,000	Ordinary	Taxed as the covenant payments are received
VII	Goodwill (residual)	$1,200,000	$0	$1,200,000	Capital gain	Yes
	Total	$2,000,000		$1,690,000

Goodwill is the residual: $2,000,000 minus $800,000 of identified assets. In this example $1,200,000 of the $1,690,000 gain is capital gain that can be spread over the note, and at least $240,000 (inventory plus recapture) is ordinary income taxed in year one no matter how little cash the seller received. That is why the allocation matters so much in a seller-financed deal: it decides how much tax is due before the note pays anything. See section 1245 recapture and installment sale depreciation recapture.

The buyer, meanwhile, deducts inventory as it is sold, depreciates equipment (possibly with bonus depreciation) and amortizes the covenant and goodwill over 15 years under §197. Shifting $100,000 from goodwill to equipment helps the buyer and costs the seller.

Supplemental Form 8594 for earnouts and price changes

When the consideration changes after the purchase date, both affected parties reallocate and, if the change happens after the year of sale, file a new Form 8594 with Parts I and III for the year the change is taken into account.

Increases go first to Class I, then to Classes II through VI in order in proportion to fair market value (never above FMV), and the rest to Class VII.
Decreases come first out of Class VII, then VI, V, IV, III and II, never below zero.
Part III asks for the prior allocation, the increase or decrease, the redetermined allocation, the tax year and form number of the original filing, and the reason.

Earnouts, contingent payments and working-capital adjustments are the usual triggers. On a contingent payment sale, the seller's installment reporting follows Reg. §15a.453-1(c); see earnout tax treatment.

Form 8594 and the installment note

A few interactions to plan for:

The note does not change the allocation. The price is allocated the same way whether the buyer pays cash or signs a note. What changes is when each piece is taxed.
Each asset is its own sale for installment purposes. Ineligible assets (inventory, recapture) are taxed up front; eligible assets (goodwill, land, the §1231 part of equipment and buildings) can be reported as payments come in.
Interest is separate. Stated interest on the note is not part of the sales price on line 3. If the note's rate is too low, part of the principal is recharacterized as interest under §483 or §1274; see imputed interest.
Seller financing terms. How to structure the note, security and default remedies is in seller financing a business.

To see how much tax falls in year one vs later years on your deal, run the installment sale calculator.

Bottom line

Form 8594 is short, but the numbers on it decide the character and timing of the seller's gain. Negotiate the allocation in the purchase agreement, make sure buyer and seller file matching forms, and remember that inventory, receivables, covenants and recapture can create a large ordinary-income bill in year one even on a mostly seller-financed sale. File a supplemental Form 8594 whenever the price changes later.

Questions to ask your CPA

How should we allocate the price among the seven classes, and is it supported by fair market values?
How much of my gain is ordinary income due in the year of sale, even with a note?
Should the covenant not to compete be a separate payment, and how will it be taxed?
Does our purchase agreement contain a written allocation that will bind both sides under §1060?
How will an earnout or working-capital adjustment be reported, and when do we file a supplemental Form 8594?

Run your own numbers. Compare a cash sale, seller financing and a structured installment sale side by side, free.

Open the calculator Get the free book

Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.