A Simple Guide to Completing IRS Form 8594

 

IRS Form 8594 is the paperwork you file with your taxes if you are buying or selling a business.

This form can be intimidating, so in today’s post, I’ll explain everything you need to know to complete and file Form 8594.

What is IRS Form 8594?

IRS Form 8594 is the “Asset Acquisition Statement Under Section 1060.” For the IRS, this form serves as the referee in the game of buying or selling a business. When a business changes hands, the IRS uses this form to keep tabs on not only the full purchase price but also what’s happening with the assets that belong to the business.

The information the buyer and seller include on their forms determine the tax consequences of the sale for both parties. For example, if a buyer overvalued certain assets, they could end up with an unfair tax advantage. For this reason, the IRS uses Form 8594 to ensure that both parties are on the same page about the value of the assets included in the sale.

Who needs to complete IRS Form 8594?

In most cases, when a business is sold, both the buyer and the seller need to complete IRS Form 8594 and file it along with their annual tax return.

How do I complete IRS Form 8594?

After entering the general information needed in Part I, you’ll complete Part II by listing all of the assets transferred as part of the business sale. For this section, the assets are broken down into classes, which is where people often get confused. Here are what the classes really mean:

  • Class I: This class refers to cash, including money in savings accounts and checking accounts. Basically, if any money held in a bank or financial institution is included in the sale, that will be accounted for here..
  • Class II: This class includes “actively traded personal property” like virtual currency, certificates of deposit, foreign currency, U.S. Government securities, and publicly traded stocks.
  • Class III: This class includes any accounts receivables.
  • Class IV: This class includes any inventory being sold with the purchase of the business. The IRS refers to this as “stock in trade.”
  • Class V: This class includes any tangible property that you haven’t already listed in a different class. For example, any furniture, fixtures, land, vehicles, buildings, or other equipment that is being included in the sale should be accounted for here.
  • Class VI: This class includes any intangible property that you haven’t already listed. For example, business books, records, operating systems, designs, patterns, licenses, permits, non-compete agreements, and trademarks would all be included in this class.
  • Class VII: This class is described by the IRS as “goodwill and going concern value.” This is a catch-all class for assets like brand reputation, public trust, and similar assets that are difficult to monetize and cannot be sold separately from the business.

In Part II of the form, you’ll enter two amounts for each class of asset. First, you’ll list the fair market value, and then you’ll list the “allocation of sales price.” Keep in mind that the allocation of sales price amount should not exceed the fair market value in any class except class VII.

Finally, you’ll answer the yes or no questions in Part II of the form. Remember to attach the form to your income tax return when you file your annual taxes.

What if the buyer and seller do not have matching Form 8594s?

The IRS doesn’t require the buyer’s Form 8594 to match the seller’s Form 8594. However, if there was a purchase agreement in writing, then the amounts on both the buyer’s and seller’s forms should match that agreement.

Additionally, there are a couple of reasons that the buyer and seller might want to make sure their forms match:

  1. Both parties may be less likely to be audited by the IRS if they have matching (or nearly matching) forms.
  2. If the buyer and seller work together with an accountant to structure the sale and accounting of assets, then the accountant can likely help both the buyer and the seller pay less in taxes due to knowing how to best organize and value the asset allocations.

IRS Form 8594 ensures fair play, transparency, and accountability when buying and selling a business. However, it’s always smart to consult an accountant and financial advisor or business broker to make sure both parties walk away from the deal with a smile on their faces and as much money as possible in their pockets.

Here are some other articles that might be of help to you if you’re buying or selling a business:

What Is IRS Form 8822-B?

What Is the IRS Direct File Project Pilot?

 

Amy Northard, CPA

The Accountant for Creatives®
+ taxes + bookkeeping + consulting
+ Hang out with me over on Instagram!

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