Asset Allocation

When a business is sold as an asset sale, the IRS generally requires both buyer and seller to allocate the sale price across asset classes on Form 8594, since each class is typically taxed differently. Buyer and seller aren't required to agree on the allocation, though many tax advisors recommend matching it to reduce audit risk.

Why it matters: Allocation tends to be a negotiation, not a formality — sellers often prefer more of the price allocated to goodwill (capital-gains treatment), while buyers often prefer more allocated to inventory and equipment (faster ordinary-income deductions). Tax treatment can also depend on entity type and deal structure. This is a decision to make with a tax professional, not a DIY judgment call. For a Main Street seller, allocation isn't a line item you fill in after the fact — it's often negotiated alongside price itself, sometimes without either side realizing that's what's happening. A buyer's accountant may push hard on equipment and inventory allocation months after the letter of intent is signed, well after the seller thought the "real" negotiating was done. Getting blindsided here can sour an otherwise-closed deal or create an unpleasant surprise at tax time the following spring.

Example (illustrative only): A $2M Main Street deal might allocate $150K to FF&E, $100K to inventory, $50K to a non-compete, and the remaining ~$1.7M to goodwill. The seller prefers as much as possible in that last bucket because goodwill typically gets capital-gains treatment; the buyer's CPA may argue for pulling more into equipment and inventory because those depreciate or deduct faster. Neither side is "wrong" — it's a legitimate tug-of-war that a tax advisor should referee before the allocation is finalized on Form 8594.

Asset classes (IRS Form 8594) — general framework, current as of ~2024-2025:

Class	Description	Seller preference	Buyer preference
I	Cash & equivalents	Neutral	Neutral
II	Securities	Neutral	Neutral
III	Accounts receivable	Neutral	Neutral
IV	Inventory	Lower allocation	Higher allocation (ordinary income deduction)
V	Other tangible assets (real estate, FF&E, vehicles)	Lower allocation	Higher allocation (depreciation)
VI	Covenants not to compete & other intangibles	Case-by-case	Case-by-case
VII	Goodwill & going concern value	Higher allocation (capital gains)	Lower allocation, unless indifferent

Classes VI and VII generally get the same 15-year amortization treatment for the buyer under current rules. If the buyer is indifferent between them, more can often be allocated to goodwill — which tends to favor the seller — though the buyer's attorney may still push for a higher non-compete allocation.

This entry describes the general Form 8594 framework as commonly applied in recent years; specific class definitions and tax treatment can change. Confirm current rules and your specific allocation strategy with a CPA or tax attorney before finalizing any deal — this is educational background, not tax advice.

Related terms: Asset Sale, Hybrid Asset-Stock Sale, Purchase Agreement, Qualified Small Business Stock (QSBS)