Form 8594 is used to report the sale and purchase of a group of assets that constitute a business. Both the purchaser and seller must file Form 8594 with their own individual income tax return.
On Form 8594, the total selling price of the business is allocated to asset classes using the residual method.
Form 8594 provides the IRS with the following information:
- The purchaser's depreciable basis in the assets transferred, and
- How the seller determined gain or loss.
Form 8594 lists seven classes of assets. For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order:
Class I assets:
- Cash and general deposit accounts (including savings and checking accounts).
- Does not include certificates of deposits held in banks, savings and loan associations, or other depository institutions.
- Certificates of deposit
- U.S. government securities
- Foreign currency
- Publicly traded personal property, including stocks and securities.
- Accounts receivable
- Other debt instruments
- Assets that you mark to market at least annually for federal income tax purposes.
- Property of a kind that would properly be included in inventory if on hand at the end of the tax year or
- Property held by the taxpayer primarily for sale to customers in the ordinary course of business.
Class V assets:
- All other assets other than Class I, II, III, IV, VI, and VII assets.
- Example of assets included in this class:
- Furniture and fixtures, equipment, buildings, land, and vehicles.
- Section 197 intangibles (other than goodwill and going concern value).
- Examples include, workforce in place, customer lists, clients lists, patient lists, trademarks, trade names.
- See the list of section 197 intangibles.
- Goodwill generally represents the excess of the price paid for a business over its net asset value (also called book value). It may have the following characteristics:
- It may be associated with a company's good reputation in terms of the products it sells, the services it performs, and it's standing in the community. Other characteristics of goodwill include:
- It may be tied to the ability of a business to continue doing business with its existing customers and to attract future customers.
- It is an intangible asset that may only be acquired as part of the acquisition of a business.
- It is a section 197 intangible whose value is amortized over 15 years by the purchaser of a business.
- Going-concern value is the value attributed to a business entity as an on-going enterprise.
- Going-concern value focuses mainly on the ability of the company's assets to generate a return on investment not simply goodwill.