The buyer is pushing for a purchase price allocation that loads up on inventory and equipment depreciation, while we want it allocated to goodwill for capital gains treatment. How do we negotiate the IRS Form 8594 allocation to protect our net proceeds?

Question

Tyler Smith · Accepted Answer

The purchase price allocation is one of the most critical, yet frequently overlooked, battlegrounds in a deal. Under Section 1060, both the buyer and the seller must file matching IRS Form 8594 statements, detailing how the purchase price is distributed across asset classes. Buyers want to allocate as much as possible to Class V and Class VI assets like equipment, inventory, and amortizable intangibles so they can write them off quickly to reduce their future tax liability. However, this triggers ordinary income and depreciation recapture taxes for you, which are taxed at much higher rates than long-term capital gains. To protect your net proceeds, you must insist on allocating the maximum amount possible to Class VII assets, which is goodwill, yielding favorable capital gains treatment. You must negotiate this allocation concurrently with the main purchase agreement, rather than leaving it as a post-closing administrative task. Demand that a detailed allocation schedule be attached as an exhibit to the asset purchase agreement before you sign. If the buyer refuses to budge on taking depreciation benefits, calculate the exact tax drag their allocation causes and require a dollar-for-dollar increase in the purchase price to gross you up for the difference.