Form 8594 Asset Acquisition Statement
An often forgotten, but very important IRS form is the 8594. Both the seller and purchaser of a group of assets that makes up a trade or business must use Form 8594 to report such a sale if goodwill or going concern value attaches, or could attach, to such assets and if the purchaser's basis in the assets is determined only by the amount paid for the assets.
Form 8594 must also be filed if the purchaser or seller is amending an original or a previously filed supplemental Form 8594 because of an increase or decrease in the purchaser's cost of the assets or the amount realized by the seller.
Both the purchaser and seller must file Form 8594 and attach it to their income tax returns (Forms 1040, 1041, 1065, 1120, 1120-S, etc.) in the year of sale when there is a transfer of a group of assets that makes up a trade or business (defined below) and the purchaser's basis in such assets is determined wholly by the amount paid for the assets.
This applies whether the group of assets constitutes a trade or business in the hands of the seller, the purchaser, or both.
If the Form 8594 is not filed with a tax return by the due date of the return and reasonable cause cannot be shown, a penalty under Sec 6721, may be imposed. The 2022 Sec 6721 penalty is $290, reduced to $50 if corrected within 30 days and $100 if corrected by August 1st.
The form allocates the businesses sales price among several categories based upon the sales agreement or if no sales agreement then by the “residual method”.
The residual method requires that all assets of an acquired business be divided into seven classes:
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Class I: Cash and cash equivalents.
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Class II: Certificates of deposit, U.S. government securities, readily marketable securities, foreign currency.
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Class III: Assets the taxpayer marks to market at least annually for tax purposes, including accounts receivable.
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Class IV: Stock in trade or other property that would be included in inventory if on hand at the close of the tax year, property held primarily for sale to customers.
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Class V: All assets other than Class I, II, III, IV, VI and VII assets (generally including furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business).
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Class VI: Code Sec. 197 intangibles, except goodwill and going concern value.
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Class VII: Assets in the nature of goodwill and going concern value.
The purchase price (reduced by Class I amounts) is allocated successively to the assets in Classes II through VI based on their fair market value. The excess (residual) of the purchase price over the values of Class I through VI assets is goodwill and going concern value.