Purchase price allocation splits the price of an asset purchase among the assets bought: cash and receivables, inventory, equipment and real estate, identified intangibles such as a non-compete, and the residual, goodwill. Buyer and seller each report the split to the IRS on Form 8594 with their tax returns for the year of sale. The allocation sets the buyer's depreciation and amortization and the seller's mix of ordinary income and capital gain. Lenders read the same schedule, because it shows how much of the price is backed by hard collateral and, on an SBA loan, drives the loan's blended maturity.
- Applies to
- Purchases of a group of assets that make up a business; not stock purchases
- Form
- IRS Form 8594, filed by both buyer and seller for the year of sale
- Method
- Residual method: seven asset classes filled in order, goodwill takes what is left
- Buyer's interest
- Faster write-offs: inventory and equipment before goodwill
- Seller's interest
- Capital gain on goodwill rather than ordinary income on equipment recapture
- Lender's interest
- How much of the price has collateral behind it, and the SBA loan's maturity
What the allocation is, and when Form 8594 applies
When a buyer purchases a company's shares, it buys one asset, the stock, and the company's own tax basis in its assets carries over unchanged. When a buyer purchases the assets instead, it is buying dozens of things at once, and the tax law needs to know what was paid for each. The purchase price allocation is that answer. It is usually an exhibit to the purchase agreement, and when buyer and seller agree to it in writing, both are generally bound to report consistently.
Form 8594, the Asset Acquisition Statement, is how each side reports the split. It applies to the purchase of a group of assets that makes up a trade or business, where the buyer's basis is set by the price paid. Most small and mid-sized acquisitions are asset purchases for exactly this reason: the buyer gets a new, higher tax basis in the assets. A stock purchase does not use Form 8594. Where the parties elect to treat a stock purchase as an asset purchase for tax, the same seven-class method applies, but the allocation is reported on a different form, Form 8883. The trade-offs between the two structures, including which is easier to finance, are covered in asset versus stock purchase financing.
This page explains how the allocation works and why lenders care about it. It is not tax advice. The allocation is one of the places where a buyer's and seller's tax advisers earn their fees, and each deal's answer depends on the parties' own tax positions.
The seven classes, filled in order
The IRS requires the residual method. The price, adjusted for liabilities the buyer assumes, is assigned to seven classes of assets in order, each up to its fair market value. Whatever is left after the first six classes are filled is goodwill and going concern value.
| Class | What it holds | How the buyer recovers the cost for tax |
|---|---|---|
| I | Cash and bank deposits | No deduction; it is cash. Usually small, because most deals are cash-free |
| II | Actively traded securities, certificates of deposit, foreign currency | Basis recovered when sold |
| III | Accounts receivable and similar assets marked to market | Recovered as the receivables are collected |
| IV | Inventory | Deducted through cost of goods sold as it is sold |
| V | Tangible property: equipment, vehicles, furniture, buildings, land | Equipment depreciated, often on an accelerated schedule; buildings over decades; land never |
| VI | Identified intangibles: customer lists, non-compete agreements, licenses, trade names, software | Generally amortized evenly over 15 years |
| VII | Goodwill and going concern value | Amortized evenly over 15 years |
Two points follow from the table. First, the buyer recovers inventory and equipment much faster than goodwill, which is why buyers push value into Classes IV and V. Second, the allocation cannot be invented: each class is capped at the asset's fair market value, so an inventory count, an equipment appraisal and a real estate appraisal set the ceilings that the negotiation happens under.
Where buyer and seller pull in opposite directions
The allocation that minimizes the buyer's tax is usually not the one that minimizes the seller's. Value assigned to equipment gives the buyer quick depreciation, but for the seller, the part of the gain that reverses earlier depreciation is generally taxed as ordinary income. Value assigned to goodwill is written off slowly by the buyer, but a seller who owns the business directly or through a pass-through entity usually pays capital gains rates on it. A non-compete is ordinary income to the seller and a 15-year write-off for the buyer, which makes a large non-compete allocation poor for both sides.
Payments that are not really price should not be buried in the allocation. A separate consulting agreement with the seller is compensation for services, deducted by the buyer as paid and taxed to the seller as ordinary income. In an SBA acquisition, that consulting role is limited: the seller may consult for up to 12 months, or up to 24 months for loans made under SOP 50 10 8.1 from 1 October 2026, and may not stay on as an owner, officer or employee. See SBA seller transition.
Agree the allocation in the purchase agreement, not after closing. An allocation left to be settled later becomes a second negotiation with a seller who has already been paid.
Why the lender reads the same schedule
A lender financing an asset purchase is lending against the same assets the allocation lists. It does not accept the allocated values as collateral values; it appraises the hard assets and lends against what they would bring in a sale, typically far less than their value in use. But the allocation tells the underwriter at a glance how the price divides between assets that can be sold and goodwill that cannot. The larger the goodwill line, the more the loan depends on cash flow alone, which is what financing goodwill is about.
On an SBA 7(a) loan the allocation has direct consequences:
- Maturity. 7(a) maturities run up to 10 years for working capital and goodwill, up to 10 years for equipment (15 if its useful life supports it), and up to 25 years for real estate. A loan that finances several of these gets a blended maturity weighted by the amounts, so the real estate share of the allocation directly lengthens the loan and lowers the payment. From 1 October 2026, change-of-ownership loans amortize over no more than 10 years except the real estate share.
- Business valuation. Where the amount financed, less appraised real estate and equipment, exceeds $250,000, or buyer and seller are related, SBA requires an independent business valuation, and the loan for the purchase cannot exceed it. The test uses appraised values, not allocated ones.
- Collateral. SBA lenders take the collateral available. Real estate and equipment in the allocation will be appraised and pledged; if they fall short, the lender often looks to the owners' personal real estate as well. See personal residence collateral.
A worked allocation, read three ways
Take an asset purchase at a price of 5,000 for a business that owns its building. The parties agree the allocation below, with inventory at a counted cost, equipment and real estate at appraised fair market value, and the residual in goodwill.
| Asset | Allocated | Buyer's tax view | Lender's view |
|---|---|---|---|
| Inventory | 400 | Deducted as sold | Collateral, typically advanced at roughly half of cost or less |
| Equipment | 900 | Depreciated quickly | Collateral at an appraised liquidation value below 900 |
| Building and land | 1,500 | Building depreciated over decades; land not at all | The strongest collateral, and the part of an SBA loan that can run up to 25 years |
| Non-compete | 100 | Amortized over 15 years | No collateral value |
| Goodwill | 2,100 | Amortized over 15 years | No collateral value; repaid from cash flow only |
| Total | 5,000 |
Now suppose the buyer's adviser proposes moving 400 from goodwill to equipment to speed up depreciation. The equipment appraisal does not support it, so the IRS could challenge it, and the lender will use its appraisal regardless. Worse, the purchase agreement, Form 8594, the business valuation and the loan's use-of-proceeds breakdown now tell different stories about the same deal. Underwriters notice when numbers that should match do not.
Real estate raises its own questions: whether the buyer holds it in a separate entity that leases to the operating company, and whether it should be financed separately. See buying a business with real estate and propco and opco structures.
Getting the allocation right, in order
The allocation has a sequence, and doing it out of order creates rework:
- At the letter of intent, agree whether the deal is an asset or stock purchase and whether real estate is included. Both change the lender's structure.
- Before the purchase agreement is signed, get a draft allocation from the tax advisers and share it with the lender, alongside the equipment list and any real estate details. Order appraisals early; they cap Classes IV and V.
- At closing, the inventory count and the working capital adjustment can shift amounts between classes. The allocation exhibit should say how.
- After closing, both sides file Form 8594 with the return for the year of sale. If the price later changes, for example because an escrow claim reduces it, each side files a supplemental statement for the year of the change.
A good lender package shows the use of proceeds by asset class, with appraised values beside the allocated ones, so the lender sees the collateral and maturity picture the allocation creates before it issues a term sheet. It also makes the sources and uses and the allocation reconcile to the same price. Transparent builds that package, financing model included, in a day once the documents are in.
Common questions
- Who files Form 8594?
- Both the buyer and the seller, each attaching it to their own federal income tax return for the year the sale occurred. The two forms should report the same allocation when the parties agreed one in writing.
- Does a stock purchase need a purchase price allocation?
- Not on Form 8594. If the parties elect to treat the stock purchase as an asset purchase for tax, the price is allocated by the same class method and reported on Form 8883. Either way, lenders still ask what the company's assets are worth, because they are the collateral, and without an election the company's existing tax basis simply carries over.
- Can we allocate most of the price to equipment to get faster depreciation?
- Only up to the equipment's fair market value, which an appraisal will establish. An allocation above that invites an IRS challenge, costs the seller more in ordinary income, and does not change what the lender will lend against the equipment.
- Does the allocation affect my SBA loan payment?
- It can. The SBA loan's maturity is blended across what it finances, and real estate can run up to 25 years against 10 for goodwill and working capital. A larger real estate share lengthens the loan and lowers the payment. From 1 October 2026, change-of-ownership loans amortize over no more than 10 years except the real estate share.
- What happens to the allocation if the price changes after closing?
- Each side files a supplemental Form 8594 for the year the change occurs, and the change is allocated using the same class order. Escrow claims and working capital true-ups are the usual causes.