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Form 8594, Asset Acquisition Statement

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Allocating the Sales Price to Assets Included in Sale of Business on Form 8594

The Residual Method:

Once you and the buyer agree on a price for all the assets of your business, the amount must then be spread out (allocated) to each asset included in the sale.

The method used to allocate the sales price is called the residual method.

The buyer and seller may enter into a written agreement as to the allocation of the sales price or the fair market value of any of the assets.

This agreement is binding on both parties unless the IRS determines the amounts are not appropriate.

How the Residual Method Works

The assets included in the sale of your business must be segregated into asset classes on Form 8594.

There are seven asset classes.

For example:

On Form 8594, for each asset class:

The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date.

Allocate the total sales price paid using the residual method as follows:

  1. Start by first reducing the total sales price by Class I assets, (if any).
  2. Then, allocate the remaining sales price to:
    • Class II assets, then
    • Class III assets, then
    • Class IV assets, and so on, in ascending order.

Class VI assets:

Class VI assets include Section 197 intangibles. However, goodwill and going concern value are excluded from Class VI; they are Class VII assets.

Example:

The residual method:

Of the $30,000, $20,000 is allocated to equipment and furniture (Class V), $7,000 to inventory (Class IV), and $3,000 to goodwill and going concern value (Class VII).