If you are buying or selling a business, you need to know about IRS Form 8594. Issued by the Internal Revenue Service (IRS), this form helps report the sales price allocation in an asset sale. The latest version ensures both buyers and sellers agree on the value of transferred assets, making tax reporting smoother. 

Whether you are new to this or need a quick update, our guide will explain everything you need to know about IRS Form 8594.

What is Form 8594?

Form 8594, known as the Asset Acquisition Statement, is a document required by the IRS during the sale or purchase of a business. This form is used to report the allocation of the sales price among the business assets transferred. 

The IRS form 8594 instructions guide both the buyer and seller on how to properly fill out and file the form to ensure that all parties agree on the asset values. 

This step is crucial for accurate tax reporting and helps prevent discrepancies that could lead to audits or penalties.

Purpose of Form 8594

The primary purpose of Form 8594 is to ensure that both the buyer and seller of a business are aligned in how the sales price is allocated among the various assets being transferred. This allocation impacts how each party reports their gains or losses for tax purposes. By providing a clear breakdown of asset values, 

Form 8594 helps the IRS verify that both parties are correctly reporting their tax liabilities. This not only promotes transparency but also aids in avoiding potential tax disputes between the buyer and seller.

Form 8594 Asset Classes

Form 8594 breaks down the assets of a business into specific classes to help accurately allocate the sales price. This classification ensures that both buyers and sellers correctly report their tax liabilities based on the type of assets being transferred. Understanding these asset classes is crucial for proper tax reporting and compliance.

Here are the main asset classes covered in Form 8594:

  • Class I: Cash and general deposit accounts, excluding certificates of deposit.
  • Class II: Actively traded personal property, such as stocks, bonds, and other marketable securities.
  • Class III: Accounts receivable, mortgages, and credit card receivables that arise in the ordinary course of business.
  • Class IV: Inventory and stock in trade, including items that will be sold to customers.
  • Class V: Furniture, fixtures, buildings, land, equipment, and other assets that do not fall into the other classes.
  • Class VI: Intangible assets, excluding goodwill and going concern value, such as patents, trademarks, and customer lists.
  • Class VII: Goodwill and going concern value, which represents the excess purchase price over the value of tangible and identifiable intangible assets.

These asset classes help both parties accurately determine the value of the business assets and ensure that each type of asset is reported correctly for tax purposes.

How to Fill Out Form 8594

Filling out Form 8594 correctly is essential for both buyers and sellers to ensure proper tax reporting and compliance. The form requires detailed information about the sale, including the allocation of the sales price among different asset classes. Following a step-by-step approach can simplify this process and help avoid common mistakes.

Here are the step-by-step instructions for filling out IRS Form 8594:

  • Step 1: Provide the basic information of both the buyer and seller, including names, addresses, and taxpayer identification numbers.
  • Step 2: Enter the total sales price agreed upon for the business.
  • Step 3: Allocate the total sales price among the asset classes specified in the form, ensuring the total matches the sales price.
  • Step 4: Include any liabilities assumed by the buyer as part of the purchase price allocation.
  • Step 5: Ensure both the buyer and seller sign and date the form to confirm their agreement on the allocation.
  • Step 6: Attach Form 8594 to your tax return and submit it to the IRS as part of your annual filing.

Common Form 8594 Filing Mistakes

Filing IRS Form 8594 can be straightforward, but common mistakes can lead to complications and potential penalties. Being aware of these mistakes can help ensure a smooth and accurate filing process. Here are some frequent errors to watch out for:

Incorrect Allocation of Sales Price: Failing to allocate the sales price among the asset classes properly can result in incorrect tax reporting.

Mismatched Information: Ensure that the information provided by both the buyer and the seller matches, as discrepancies can trigger IRS audits.

Incomplete Form: Leaving sections blank or incomplete can delay processing and may lead to fines.

Ignoring IRS Form 8594 Instructions: Not following the IRS Form 8594 instructions can cause errors in the filing process.

Missing Signatures: Both parties must sign the form to validate the agreement on the asset allocation.

Incorrect Tax Year: Make sure the form corresponds to the correct tax year of the sale.

Not Attaching to Tax Returns: Failure to attach Form 8594 to your tax return can result in incomplete filing and potential issues with the IRS.

How to Submit Form 8594

Submitting Form 8594 is a crucial step in finalizing the sale of business assets. Start by thoroughly completing the form with all required details, including your name, taxpayer identification number (TIN), and information about the other party involved in the transaction. 

Once you've filled out Form 8594, attach it to your income tax return for the year in which the asset sale took place. This ensures that the allocation of the sales price is properly recorded and reported to the IRS, helping you stay compliant and avoid potential issues.

Form 8594 Tax Filing Deadlines and Due Dates

When a business transaction involves the sale of assets, both the seller and the buyer must complete Form 8594, Asset Acquisition Statement Under Section 1060, and attach it to their respective tax returns for the year in which the transfer occurs. 

Timely submission of Form 8594 is essential to ensure that asset allocations are properly reported and agreed upon. Missing this deadline can lead to significant consequences, including penalties of up to $50,000. 

Additionally, the IRS may disregard the allocations reported by the buyer and seller and impose its own, potentially less favorable, allocation. To avoid these issues, ensure that Form 8594 is accurately completed and submitted along with your tax return by the appropriate due date.

Conclusion

Properly filing IRS Form 8594 is vital for anyone involved in the sale or purchase of a business. By accurately allocating the sales price among asset classes and meeting all deadlines, both buyers and sellers can ensure smooth tax reporting and avoid costly penalties. Staying informed about IRS Form 8594 and following the guidelines carefully will help you navigate the complexities of asset transfers and maintain compliance with IRS regulations.