What Is Form 8594? Filing, Allocation, and Penalties

Form 8594 is the IRS Asset Acquisition Statement that both the buyer and the seller of a business file to report how the total purchase price is divided among the individual assets in the sale. Each side attaches its own copy to its federal income tax return for the year the sale closed, and the allocation on the form drives how the seller’s gain is taxed and how quickly the buyer can recover the cost of what they bought.

When You Have to File Form 8594

Internal Revenue Code Section 1060 requires the form whenever a group of assets that makes up a trade or business changes hands and the buyer’s tax basis in those assets is determined entirely by what was paid.¹ The IRS calls this an “applicable asset acquisition.” The test is whether goodwill or going-concern value could attach to the assets being transferred; if it could, the form is required.² Even if the purchase agreement puts zero dollars on goodwill, the possibility that goodwill exists is enough to trigger the filing.

Buyer and seller each carry an independent filing obligation, whether or not they have signed a written allocation. The requirement applies to individuals, partnerships, C corporations, S corporations, and trusts and estates alike.

The Seven Asset Classes and the Residual Method

Part II of the form spreads the purchase price across seven categories, running from the most liquid assets to the most intangible:³

Class I is cash and general deposit accounts such as checking and savings, reported at face value.
Class II covers actively traded personal property, including certificates of deposit and foreign currency.
Class III is debt instruments and assets marked to market annually for federal income tax purposes, including accounts receivable.
Class IV is inventory and other property held primarily for sale to customers in the ordinary course of business.
Class V is all other tangible assets: furniture, fixtures, equipment, vehicles, buildings, and land.
Class VI is Section 197 intangibles other than goodwill and going-concern value, such as licenses, permits, trademarks, trade names, covenants not to compete, and customer-based intangibles.
Class VII is goodwill and going-concern value.

The allocation follows what the IRS calls the residual method. You assign consideration to Class I at face value, then work down through Classes II to VI, allocating up to the fair market value of the assets in each class. Whatever consideration is left after Class VI has been filled falls into Class VII. Goodwill is always the plug: it is the difference between the total price paid and the combined fair market value of everything else. Because most business sales pay more than the tangible assets are worth on their own, a large share of the price often lands in Classes VI and VII.

Why the Allocation Matters

Buyer and seller have opposite tax incentives on the same numbers, which is the whole reason the IRS requires both sides to report.

For the seller, amounts allocated to Class V tangible personal property can trigger depreciation recapture under Section 1245, taxing the portion of the gain tied to prior depreciation deductions as ordinary income instead of at long-term capital gains rates.⁴ Amounts allocated to Class VII goodwill generally qualify for long-term capital gains treatment when the business was held more than a year. Sellers therefore lean toward more goodwill and less equipment.

Buyers lean the other way. Class V property can be depreciated under MACRS, with recovery periods commonly running five to seven years depending on the asset.⁵ Class VI and Class VII intangibles, including goodwill, trademarks, and covenants not to compete, must be amortized over a fixed 15-year period.⁶ The buyer generally wants more assigned to shorter-lived tangible assets to recover cost sooner.

The IRS matches the two filings. A buyer claiming heavy depreciation on Class V while the seller reports little ordinary income on the same assets is exactly the kind of mismatch that draws attention.

Written Allocation Agreements

If the buyer and seller agree in writing on the allocation or on the fair market value of specific assets, that agreement binds both sides for tax purposes, and neither can report something different on their Form 8594.¹ The IRS retains authority to override the agreement if the stated values do not reflect fair market value. Including a detailed allocation schedule in the purchase agreement is common practice and keeps the two filings from diverging.

How and When to File

Form 8594 is not filed on its own. It is attached to the federal income tax return for the year the sale closed: Form 1040 for individuals, Form 1065 for partnerships, Form 1120 for C corporations, Form 1120-S for S corporations, and Form 1041 for estates and trusts.⁷ The deadline is the return’s deadline. If you extend the return, the form goes in with the extended filing.

Each party completes its own Form 8594 with its name, address, and taxpayer identification number, the other party’s identifying details, the closing date, and the total consideration, which includes any liabilities the buyer assumes. Sellers reporting the sale of business property will generally also file Form 4797, whose instructions direct sellers in an applicable asset acquisition to attach Form 8594 for the allocation.⁸

Changes to the Purchase Price After Filing

Business sales often include earn-outs, contingent payments, or post-closing adjustments that shift the total price in a later year. When that happens, the affected party files a supplemental Form 8594, completing Parts I and III, with the income tax return for the year the adjustment takes effect rather than amending the original year’s return.⁷⁹

If the purchase price cannot be determined when the original form is due, you assume any contingencies will be met and report the highest possible consideration. If even the maximum cannot be calculated, you describe on the form how the consideration will be computed and over what period.³ A new supplemental filing is required for each later year that changes the total, and each one must state the reason for the change and identify the tax year and form under which the original and any prior supplemental statements were filed.

Penalties for Missing or Incorrect Filings

A missing or incorrect Form 8594 is treated as a failure to file a correct information return under Section 6721. For returns due in 2026, the standard penalty is $340 per return, dropping to $60 if corrected within 30 days of the due date and $130 if corrected after 30 days but on or before August 1.¹⁰¹¹ Intentional disregard raises the penalty to at least $680 per return, or a percentage of the aggregate amount that should have been reported, whichever is greater, with no annual cap.¹² The bigger practical risk for most filers is that inconsistent buyer and seller filings tend to draw IRS inquiries that can broaden into audits of both returns.

Records to Keep

Hold on to everything that supports the allocation: appraisals of tangible and intangible assets, the purchase agreement, closing documents, and your residual-method worksheets. Keep them at least through the statute of limitations for the year of sale, which is generally three years after filing, extending to six years if more than 25 percent of gross income was omitted from a return.¹³ Buyers who are depreciating or amortizing the purchased assets should keep those records until the limitations period closes for the year they finally dispose of each asset, because the same figures determine gain or loss on that later sale.

1
Office of the Law Revision Counsel. 26 U.S. Code 1060 – Special Allocation Rules for Certain Asset Acquisitions
2
Internal Revenue Service. About Form 8594, Asset Acquisition Statement Under Section 1060
3
Internal Revenue Service. Instructions for Form 8594 (Rev. November 2021) – PDF
4
Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
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
7
Internal Revenue Service. Instructions for Form 8594 (11/2021)
8
Internal Revenue Service. 2025 Instructions for Form 4797 – Sales of Business Property
9
eCFR. 26 CFR 1.1060-1 Special Allocation Rules for Certain Asset Acquisitions
10
Internal Revenue Service. Information Return Penalties
11
Internal Revenue Service. Revenue Procedure 2024-40
12
Office of the Law Revision Counsel. 26 U.S.C. 6721 – Failure to File Correct Information Returns
13
Internal Revenue Service. How Long Should I Keep Records?