Purchase Price Allocation When Selling a Business

How Form 8594 works and why the split of the price changes what you keep after tax.

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By Selling Right Advisors · Published November 4, 2026 · Owner-to-owner education for US companies with $2M–$50M in revenue. General information only — not legal, tax, or investment advice.

Two offers with the same headline price can leave you with very different amounts after tax. A big reason is purchase price allocation: how the price in an asset sale is divided among the things being sold, such as equipment, inventory, customer relationships, and goodwill. The split is reported to the IRS on Form 8594, and it drives how much of your gain is taxed as ordinary income versus capital gain. This guide explains how it works from the seller's side for owners of $2M–$50M companies.

What purchase price allocation is

In an asset sale the buyer is technically buying a list of assets rather than your company's shares. Tax rules require the total price to be spread across those assets in a set order, called the residual method. Each class is filled up to its fair market value, and whatever is left over lands in goodwill and going concern value at the end.

Buyer and seller should report the same numbers. A purchase agreement usually includes an allocation schedule or a clause that says who prepares it, how disputes are settled, and that both sides will file consistently.

The seven asset classes on Form 8594

Class	What goes in it	Typical seller tax character
I	Cash and bank deposits	Generally no gain
II	Actively traded securities, certificates of deposit, foreign currency	Depends on the asset
III	Accounts receivable and similar assets	Often ordinary income for cash-basis sellers
IV	Inventory	Ordinary income
V	Equipment, vehicles, furniture, buildings, land, and other tangible assets	Depreciation recapture on equipment is usually ordinary income; gain above original cost can be capital gain
VI	Section 197 intangibles other than goodwill, such as customer lists, licenses, trademarks, software, and non-competes	Mostly capital gain, except non-compete payments, which are usually ordinary income
VII	Goodwill and going concern value	Usually long-term capital gain for owners of pass-through entities

These are general patterns, not rules for your situation. Entity type matters a great deal. In a C corporation asset sale, for example, gain is taxed first at the corporate level and again when proceeds are distributed to shareholders, which is one reason C corporation owners often push for a stock sale.

Where buyers and sellers pull in opposite directions

The allocation is a zero-sum negotiation over tax timing and character. Buyers generally prefer value on equipment and other assets they can write off quickly. Sellers generally prefer value on goodwill, because it tends to be taxed at capital gain rates rather than ordinary rates.

Equipment. A high equipment value helps the buyer depreciate quickly, but it can increase the seller's depreciation recapture, which is taxed as ordinary income up to the depreciation previously taken.
Non-compete. A large allocation helps the buyer only a little, since it is amortized over 15 years like goodwill, yet it can turn part of the seller's gain into ordinary income.
Consulting or transition pay. Money paid for your services after closing is compensation, not purchase price. It is ordinary income and may carry payroll or self-employment tax.
Real estate. If the building is included, how much is assigned to land versus structure affects both sides. Land is not depreciable.

Personal goodwill

In some businesses, much of the value comes from the owner's own relationships, reputation, and skills rather than from the company. Where the facts support it, part of the price may be paid to the owner personally for that personal goodwill instead of to the company. For C corporation owners in particular, this can reduce double taxation. It requires careful documentation and a credible fact pattern, so it is a conversation for your tax advisor early, not at closing.

How allocation changes what you keep: a simple illustration

Consider an illustrative $8 million asset sale of a pass-through business. Moving $500,000 from goodwill to equipment that has already been fully depreciated converts that $500,000 from likely capital gain to likely ordinary income for the seller. Depending on your bracket, that single change could cost you a meaningful amount after tax, while saving the buyer some tax in the early years. These numbers are example figures only; your CPA should run the real calculation with your asset basis.

Practical steps for sellers

Ask your CPA for a fixed asset register showing original cost and accumulated depreciation before you go to market.
Get a realistic view of what your equipment would appraise for. Buyers sometimes propose values well above book.
Address allocation in the letter of intent, even if only by agreeing on the method and who prepares the first draft.
Compare offers on an after-tax basis, not headline price.
Make sure the final purchase agreement requires both parties to file Form 8594 consistently.
If you own the real estate, decide early whether it is part of the sale or will be leased to the buyer.

Where we can help

We are not your tax advisor, and your CPA or tax attorney should sign off on any allocation. What we do is help owners compare offers on the terms that actually drive what they keep, including structure and allocation, and bring the right questions to the table early in the process.

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Frequently asked questions

Who files Form 8594 when a business is sold?

In an asset sale, both the buyer and the seller generally attach IRS Form 8594 to their federal income tax returns for the year the sale closes. The two forms should show the same allocation, which is why the purchase agreement usually spells it out or sets a process for agreeing on it.

Do I need Form 8594 if I sell the stock of my company?

Usually not. A straight stock sale transfers ownership of the entity, and the company keeps its existing tax basis in its assets. Form 8594 applies to asset purchases. Some stock deals are treated as asset purchases for tax purposes through special elections, and those have their own reporting, so ask your CPA which applies to your deal.

Why does the buyer care how the price is allocated?

The allocation sets the buyer's tax basis in each asset. Amounts put on equipment can often be depreciated quickly, while goodwill and most other intangibles are amortized over 15 years. Buyers usually want more value on faster write-off assets, and sellers usually want more on assets that produce capital gain.

Is allocation to a non-compete good or bad for the seller?

Generally less favorable. Payments for a non-compete are typically ordinary income to the seller, while the buyer still amortizes them over 15 years. Many sellers' advisors try to keep the non-compete allocation modest and supported by the facts.

When should allocation be negotiated?

Raise it at the letter-of-intent stage, or at least agree there on the method, and finish it in the purchase agreement. Leaving it until after closing gives you little leverage and can create a mismatch between the buyer's and seller's filings.