Key Insight
The same $1M purchase price allocated differently can save or cost each party tens of thousands in taxes. Allocation is a negotiation — with real money at stake.
The Asset Classes (IRS Form 8594)
The IRS requires both buyer and seller to report the same allocation on Form 8594 using seven classes:
| Class | Examples | Buyer's preference | Seller's preference |
|---|---|---|---|
| I | Cash and deposits | Neutral | Neutral |
| II | Marketable securities | Neutral | Neutral |
| III | Accounts receivable | Higher (ordinary deduction) | Lower (ordinary income) |
| IV | Inventory | Higher (ordinary deduction) | Lower |
| V | Equipment and furniture | Higher (depreciates fast) | Lower |
| VI | Intangibles (non-compete, customer lists) | Higher (15-yr amortization) | Lower (ordinary income) |
| VII | Goodwill | Lower (15-yr amortization) | Lower (capital gains) |
Why Allocation Is a Negotiation
Buyers prefer higher allocation to equipment and tangible assets (fast depreciation, tax deductions sooner) and intangibles (15-year amortization). Lower to goodwill.
Sellers prefer more allocation to goodwill and capital-gain-eligible assets (lower tax rate). Less to non-compete payments and AR (taxed as ordinary income).
The parties must agree — they're legally required to report identical allocations. Disagreement is common and typically resolved as part of APA negotiations.
Non-Compete Clauses
A non-compete payment is allocated to Class VI (intangibles) and taxed as ordinary income to the seller. Sellers often prefer to minimize this; buyers may prefer a higher non-compete value for amortization purposes.
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