A basket purchase allocation splits one lump-sum price across the individual assets you acquired, using each asset’s fair market value as the weight. Under U.S. GAAP, each asset’s share of the total cost equals its FMV divided by the combined FMV of everything in the group, multiplied by the price paid. If the assets make up a trade or business, federal tax law overrides that proportional method and requires the residual method on IRS Form 8594. The allocation you land on sets the cost basis you will depreciate, amortize, and measure gain or loss against for as long as you hold each asset, so the work you do at closing follows the assets through every future return.
Decide First Whether You Bought Assets or a Business
The accounting framework depends on what you actually acquired. Under GAAP, the test starts with a concentration screen: if substantially all the fair value of the purchase is concentrated in a single identifiable asset or group of similar assets, it is an asset acquisition. If not, you look at whether the acquired set includes at least an input and a substantive process that together create outputs. If it does, you have a business combination under ASC 805. If it does not, you have an asset acquisition under ASC 805-50.
The practical consequences diverge in two places. First, goodwill. In an asset acquisition the codification is explicit that allocating cost “shall not give rise to goodwill”; any premium above combined fair values is simply spread proportionally across the identifiable assets. In a business combination, each identifiable asset is recorded at its individual fair value and any excess becomes goodwill on the balance sheet.
Second, transaction costs. In an asset acquisition, legal fees, appraisal costs, and due diligence expenses are capitalized into the total cost you allocate. In a business combination, those same costs are expensed as incurred. The classification changes both how you allocate and how much you have to allocate.
List Every Asset and Price Each One
Start by cataloging everything the purchase included, tangible and intangible. Land, buildings, equipment, and inventory on one side; patents, customer lists, software, non-compete agreements on the other. An asset you forget to list does not vanish from your books. Its value just gets absorbed into the basis of whatever you did list, distorting depreciation and future gain calculations for every one of those assets.
Each asset then needs a defensible fair market value as of the acquisition date. The relative FMVs drive the entire allocation, so the valuation work is the single most consequential input in the process. Real property typically calls for an independent appraisal. Equipment is often valued from comparable sales or replacement cost new, adjusted for wear. Inventory fair value is generally net realizable value: estimated selling price less costs to complete and sell. Intangibles often require an income approach that discounts expected future cash flows to present value, though acquired software is sometimes valued at replacement cost less functional depreciation.
Weak appraisals are a false economy. The IRS has specific penalties for substantial valuation misstatements, and thin documentation is the fastest way to earn one.
The Proportional Allocation, With Numbers
Once each asset has an FMV, the arithmetic is simple. Divide each asset’s FMV by the sum of all FMVs to get its percentage, then multiply by the total price paid. That product is the asset’s allocated cost basis.
Say a company pays $900,000 for three assets appraised at $300,000 (equipment), $600,000 (building), and $100,000 (land). Total appraised value is $1,000,000.
- Equipment: 30% of $900,000 = $270,000
- Building: 60% of $900,000 = $540,000
- Land: 10% of $900,000 = $90,000
The allocated bases always sum to the price paid. The appraised values set the percentages; the assets are recorded at their share of the actual cost, not at their standalone appraised numbers. The same mechanics work when the price exceeds total appraised value. Pay $1,100,000 for that same group, and each asset’s basis comes out proportionally higher than its appraisal. The method assumes any overall bargain or premium is spread evenly across the group.
Add Transaction Costs Before Allocating
In an asset acquisition, direct costs are added to the purchase price before you run the percentages. If the buyer above spent $45,000 on attorneys and appraisers, the allocable total becomes $945,000 and each asset’s share rises proportionally.
The Journal Entry
Each asset account is debited for its allocated cost; cash (or a liability if the purchase is financed) is credited for the total paid. Using the $900,000 cash example:
- Debit Equipment $270,000
- Debit Building $540,000
- Debit Land $90,000
- Credit Cash $900,000
Each asset enters the fixed asset register at its allocated cost. From that moment on, that number is the starting point for depreciation, amortization, impairment testing, and the eventual gain or loss on disposal.
How the Allocated Basis Moves Through the Books
What happens next depends on how each asset is classified.
Property, plant, and equipment are depreciated over their estimated useful lives. Books commonly use straight-line, taking allocated cost less salvage value divided by years. Tax returns typically use MACRS, which front-loads deductions. The gap between book and tax depreciation generates a deferred tax item that has to be tracked.
Land is not depreciated. Its allocated basis sits on the balance sheet unchanged until sale or impairment. This is why the land-versus-building split matters so much on real property deals: every dollar pushed to land is a dollar you cannot depreciate.
Inventory flows through cost of goods sold when the goods are sold.
Finite-lived intangibles like patents and customer relationships are amortized over the shorter of their economic or legal life for book purposes. For tax, most acquired intangibles are Section 197 intangibles amortized ratably over 15 years regardless of actual useful life.1Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles Another book-tax timing difference to carry.
Goodwill appears only when the deal is a business combination. Public companies do not amortize it; they test it for impairment at least annually and write it down when a reporting unit’s fair value drops below its carrying amount.2Deloitte Accounting Research Tool. When to Test Goodwill for Impairment Private companies can elect to amortize goodwill straight-line over ten years and test only on triggering events.
The Tax Rule Is Different: Section 1060’s Residual Method
When a basket purchase involves a trade or business and the buyer’s basis is set solely by the amount paid, Internal Revenue Code Section 1060 requires both buyer and seller to allocate the price using the residual method of Section 338(b)(5).3Office of the Law Revision Counsel. 26 U.S. Code 1060 – Special Allocation Rules for Certain Asset Acquisitions4Internal Revenue Service. About Form 8594, Asset Acquisition Statement Under Section 1060 Instead of proportional spreading, the price is poured sequentially into seven asset classes. Each class is filled to the FMV of its contents before any remainder moves to the next class.5eCFR. 26 CFR 1.338-6 – Allocation of ADSP and AGUB Among Target Assets
- Class I: Cash and general deposit accounts, at face value
- Class II: Actively traded securities, CDs, and foreign currency
- Class III: Debt instruments and accounts receivable
- Class IV: Inventory and stock in trade
- Class V: Everything else not in another class, including equipment, furniture, and real property
- Class VI: Section 197 intangibles other than goodwill and going concern value, such as patents, customer lists, covenants not to compete, and trademarks
- Class VII: Goodwill and going concern value
The method is called residual because Class VII gets whatever is left after Classes I through VI are filled. On many business acquisitions that residual is sizeable, and it is then amortized over 15 years under Section 197.
If buyer and seller agree in writing on the allocation or on any asset’s FMV, that agreement binds both parties for tax purposes unless the IRS finds it inappropriate. Negotiate the allocation before closing. Changing it later means both sides have to amend.
Filing Form 8594
Both buyer and seller file IRS Form 8594, Asset Acquisition Statement, when the deal involves a trade or business and goodwill or going concern value could attach to the assets.6Internal Revenue Service. Instructions for Form 8594 The form reports the total price and the amount allocated to each of the seven classes. It is attached to the income tax return for the year of sale. If the allocation later changes because of contingent payments, earnouts, or post-closing adjustments, the affected party files an updated Form 8594 with that year’s return.7Internal Revenue Service. Instructions for Form 8594 – Asset Acquisition Statement Under Section 1060
Buyer and seller are not required to agree, but each reports what they used. When the two filings disagree, the IRS notices. Inconsistent 8594s are a common trigger for correspondence or examination.
What It Costs to Get Wrong
Failing to file a correct Form 8594 by the due date triggers information return penalties. For 2026, that is $60 per form if filed within 30 days of the deadline, $130 if filed between 31 days late and August 1, and $340 if filed after August 1 or not at all. Intentional disregard raises the penalty to $680.8Internal Revenue Service. Information Return Penalties
The larger exposure is valuation. A substantial valuation misstatement that causes a tax underpayment carries an accuracy-related penalty of 20% of the underpayment attributable to the misstatement.9Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments Because the allocation sets the depreciable basis of every asset in the group, a bad number in year one compounds through every later depreciation deduction. The cumulative exposure is often far larger than the original error looked.
Keep the Paperwork as Long as You Hold the Assets
Appraisals, the purchase agreement, Form 8594, and the valuation workpapers should be kept until the statute of limitations closes for the tax year you dispose of the last asset in the basket. The IRS requires property records to be retained long enough to compute depreciation, amortization, and gain or loss on sale.10Internal Revenue Service. How Long Should I Keep Records? For land or a building held for decades, that means keeping the original allocation file for decades. Losing those records does not reduce the tax owed. It just makes the position much harder to defend.