Business Purchase Tax Deduction: Assets, Goodwill, and Form 8594

When you buy a business, federal tax law treats the transaction as a purchase of individual assets, and you recover the price through a combination of immediate expensing, depreciation, amortization, and interest deductions. The biggest business purchase tax deductions available in 2026 are Section 179 expensing (up to $2,560,000), 100% bonus depreciation on qualifying property, and 15-year amortization of goodwill and other intangibles. How much you actually claim, and how quickly, depends on whether you structured the deal as an asset purchase or a stock purchase and how you allocate the price across the assets you bought.

Asset Purchase vs. Stock Purchase

Deal structure decides whether the deductions in this article are available to you at all. In an asset purchase, you buy individual pieces of the business — equipment, inventory, customer lists, goodwill — and you get a fresh tax basis in each one. That fresh basis is what creates the depreciation and amortization deductions described below.

In a stock purchase, you buy the seller’s ownership shares and the company’s assets keep their old tax basis. You inherit whatever depreciation schedules already existed, which usually means much smaller deductions going forward. If the seller insists on a stock sale (common with C-corporations because it gives the seller better tax treatment), you can sometimes negotiate a Section 338(h)(10) election. Both parties must agree, but the election effectively treats the stock purchase as an asset purchase for tax purposes, giving you the stepped-up basis you need. The seller faces higher tax liability in exchange, which often gets folded into price negotiations.

Allocating the Purchase Price

The IRS requires both buyer and seller to use the “residual method” to divide the total purchase price across seven classes of assets, starting with cash and working up to goodwill. Whatever amount is left after filling each class gets pushed to the next. This allocation is not informal. It sets your tax basis for every asset you acquired, which controls every deduction you’ll claim for years afterward.

The seven classes, in order of priority:

Class I — Cash and bank deposits (not including certificates of deposit).
Class II — Actively traded securities and certificates of deposit.
Class III — Accounts receivable and debt instruments.
Class IV — Inventory and goods held for sale.
Class V — All other tangible assets: equipment, furniture, vehicles, real property.
Class VI — Intangible assets other than goodwill (patents, trademarks, customer lists, non-competes).
Class VII — Goodwill and going concern value.

Both parties report the allocation on Form 8594, attached to each party’s tax return for the year of the sale. The IRS cross-references the buyer’s and seller’s versions, so inconsistent numbers can trigger an inquiry. A written allocation agreement generally binds both sides for tax purposes unless someone can prove fraud or mistake.¹

From a buyer’s standpoint, the ideal allocation pushes as much value as possible into Class V tangible assets (which can be depreciated quickly or expensed immediately) and as little as possible into Class VII goodwill (which must be amortized over 15 years). Sellers typically want the opposite. The allocation still has to be defensible based on fair market values; you can’t just assign numbers that feel convenient.²

Deducting Tangible Assets

Section 179 Immediate Expensing

Section 179 lets you deduct the full cost of qualifying tangible property — equipment, machinery, computers, office furniture, certain vehicles — in the year you place it in service rather than spreading the deduction over multiple years. For tax year 2026, the maximum Section 179 deduction is $2,560,000. The deduction phases out dollar-for-dollar once total qualifying property placed in service during the year exceeds $4,090,000.³

A $32,000 cap applies to Section 179 deductions on sport utility vehicles, so if the business you’re buying includes a fleet of large SUVs, plan accordingly. The property must be used more than 50% for business purposes to qualify, and the deduction can’t exceed your taxable income from active business operations for the year.³

Bonus Depreciation at 100%

The One, Big, Beautiful Bill, enacted on July 4, 2025, permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025.⁴ Bonus depreciation applies to property with a MACRS recovery period of 20 years or less, which covers most equipment and machinery a buyer would acquire.

Unlike Section 179, bonus depreciation has no dollar cap and no income limitation. You can use it to create or deepen a net operating loss. For many business acquisitions in 2026, combining Section 179 with 100% bonus depreciation means the entire tangible-asset portion of the purchase price can be deducted in year one.

MACRS for Anything Left Over

Any tangible assets you don’t expense immediately get depreciated under the Modified Accelerated Cost Recovery System. The recovery period depends on the asset type:

5-year property — automobiles, computers, office machinery, and most equipment used in research.
7-year property — office furniture and fixtures such as desks and filing cabinets.
15-year property — land improvements like parking lots and fencing.
39-year property — commercial buildings (nonresidential real property).

MACRS uses accelerated methods that front-load deductions into the earlier years of ownership. Track when each asset was placed in service, because the first-year deduction depends on which half of the year it entered use.⁵

Amortizing Goodwill and Other Intangibles

Intangible assets follow a completely different schedule. Under Section 197, you amortize the cost of goodwill, customer lists, workforce in place, non-compete agreements, patents, trademarks, and franchise rights over exactly 15 years on a straight-line basis, regardless of the asset’s actual useful life.⁶

The math is straightforward. Divide the value assigned to the intangible by 180 months and deduct that amount each month. If you allocated $300,000 to goodwill, your annual amortization deduction is $20,000 for 15 years. The deduction begins in the month you acquired the asset, so a mid-year purchase produces a partial first-year deduction.

The non-compete agreement is where this rule frustrates buyers most. Even if the seller’s non-compete lasts only two or three years, federal law still requires you to spread the deduction over 15 years. The Tax Court has upheld this repeatedly, so there is no shortcut. This is one reason buyers try to allocate less of the purchase price to non-competes and more to tangible assets that can be expensed immediately, though the allocation must still reflect fair market values.⁶

Closing Costs and Start-Up Expenses

The legal, accounting, and advisory fees you pay to close the deal are not ordinary business expenses. Most of those costs are capital expenditures that get added to the basis of the assets acquired. Section 195 carves out an exception for start-up costs: you can deduct up to $5,000 immediately in the year the business begins operating, with the remainder amortized over 180 months.⁷

The $5,000 immediate deduction shrinks dollar-for-dollar once your total start-up costs exceed $50,000 and disappears entirely at $55,000. For most business acquisitions, where professional fees alone can run well into six figures, that immediate write-off may be partially or fully eliminated.⁷

Investigatory costs — what you spend looking for and evaluating a business before deciding to buy — qualify as start-up expenses under Section 195. Facilitative costs, what you spend actually closing the deal after the decision is made (drafting the purchase agreement, formal appraisals), generally get capitalized into the asset basis. Keep your invoices clearly separated by phase. It determines whether a cost qualifies for the Section 195 deduction or simply adds to your depreciable or amortizable basis.

Interest on Acquisition Debt

Most acquisitions involve some borrowed money, and the interest is generally deductible, subject to a cap. Section 163(j) limits the deduction for business interest expense to the sum of business interest income plus 30% of adjusted taxable income for the year. Any interest you can’t deduct in the current year carries forward indefinitely.⁸

Adjusted taxable income for this purpose adds back deductions for depreciation, amortization, and depletion, which makes the cap more generous than it might first appear, especially in the early years of ownership when those deductions are largest. Small businesses with average annual gross receipts of $30 million or less over the preceding three years are exempt from the Section 163(j) limitation entirely, which covers the majority of acquisitions by individual buyers and small firms.⁸

Reporting the Purchase on Form 8594

Form 8594 must be attached to your federal income tax return for the year the purchase closed. Sole proprietors file it with Form 1040, partnerships with Form 1065, S-corporations with Form 1120-S, and C-corporations with Form 1120.¹

Deadlines follow the entity type. Sole proprietors file by April 15 (calendar-year filers). Partnerships and S-corporations file by March 15. C-corporations generally file by April 15, though fiscal-year filers have different dates. Extensions extend the time to file, not the time to pay any tax owed.⁹

If the allocation changes after filing (an earnout, a working capital adjustment, a dispute resolution), both parties must file a supplemental Form 8594 for the year of the adjustment. Keep the original allocation documentation and any amendments together. The IRS can review these years later and will expect the numbers to reconcile.¹

Two Costs That Sit Outside the Deduction Framework

An asset purchase shields you from most of the seller’s pre-existing liabilities, but tax debts are an important exception. Under state successor liability rules, a buyer who continues the same business, retains the seller’s employees, and uses the same location can be held responsible for the seller’s unpaid sales tax and payroll tax obligations even if the purchase agreement says otherwise. Request tax clearance certificates from the relevant state tax authorities before closing. States that require bulk sale notification typically give their tax agencies anywhere from about two weeks to 45 days to review the seller’s account before clearing the transaction.

State sales tax also applies to the transfer of tangible business assets in many states, unless a specific exemption covers the deal. Some states offer a bulk sale exemption; others do not, and instead require compliance filings that, if missed, can make the buyer responsible for the seller’s unpaid sales taxes. This sits outside the income tax framework, involves different agencies and deadlines, and can catch a buyer off guard if not budgeted for.

1
Internal Revenue Service. Instructions for Form 8594 – Asset Acquisition Statement Under Section 1060
2
Internal Revenue Service. Sale of a Business
3
Internal Revenue Service. Revenue Procedure 2025-32
4
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
5
Internal Revenue Service. Publication 946 – How To Depreciate Property
6
Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles
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Office of the Law Revision Counsel. 26 U.S. Code 195 – Start-Up Expenditures
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Office of the Law Revision Counsel. 26 U.S. Code 163 – Interest
9
Internal Revenue Service. Starting or Ending a Business