What is purchase price allocation (Form 8594), and why does it matter?

How does the allocation work?

The IRS uses a residual method for asset acquisitions. Assets are assigned values in a set order, at fair market value. Goodwill gets whatever is left.

1. Cash and cash-like items.
2. Securities and similar items.
3. Accounts receivable.
4. Inventory.
5. Equipment, vehicles, furniture, real estate and other tangible property.
6. Identifiable intangibles: customer lists, licenses, trade names, software and the seller's non-compete.
7. Goodwill and going-concern value: the residual.

Both sides attach Form 8594 to their federal income tax returns for the year of the sale. The forms should match. A mismatch invites questions from the IRS.

Where do buyer and seller interests conflict?

• Equipment. You usually prefer more here, because equipment generally depreciates faster than 15 years. The seller often prefers less, because gain on equipment up to the depreciation already taken is generally taxed as ordinary income.
• Goodwill. You deduct it over 15 years. An individual or pass-through seller generally gets capital-gain treatment. Sellers usually want the most here.
• Non-compete. A non-compete signed as part of an acquisition is generally a Section 197 intangible. You amortize it over 15 years, the same as goodwill. The seller generally pays ordinary-income rates on it. So a large non-compete allocation hurts the seller and gives you no faster deduction.
• Inventory. You recover it as you sell it. At the seller's cost, it is usually close to neutral for both sides.
• Real estate. Land is not depreciable. Buildings depreciate over a long life. Split land and building carefully if real estate is in the deal.

A seller that is a C-corporation faces different math, because the corporation is taxed on the sale before anything reaches its owners. Its CPA will say how the allocation affects it.

How do you negotiate the allocation?

1. Raise it early. Put the allocation, or at least the method, in the letter of intent. Leaving it until after closing invites a dispute when both CPAs finally look.
2. Model both sides. Ask your CPA for your after-tax cost under two or three splits. Estimate the seller's after-tax proceeds too.
3. Trade, don't fight. If a buyer-friendly split saves you more than it costs the seller, you can offer a small price increase in exchange. If the seller insists on their split, ask for a lower price or better note terms.
4. Keep it defensible. Support equipment values with an appraisal or a detailed asset list. Values that don't match reality can be challenged.
5. Separate paid services from price. If the seller will consult after closing, pay a fair fee for real work under its own agreement. You generally deduct it as paid. The seller generally reports it as ordinary income.

If you are using an SBA loan

As of October 2026, every SBA change-of-ownership loan needs an independent business valuation. Total debt is capped at the appraised value of the business. Shifting the allocation does not change that cap. Equipment and goodwill are financed as the business portion, amortized over up to 10 years. Real estate can amortize over up to 25 years. A seller may stay on as a consultant or employee for up to 24 months in total after closing.

Worked example: two ways to split a $1.5M purchase

Illustrative figures. Your CPA will apply the actual depreciation rules.

• Price: $1,500,000. Inventory $50,000 and non-compete $25,000 in both splits.
• Split A (seller-friendly): equipment $100,000; goodwill $1,325,000.
• Split B (buyer-friendly): equipment $300,000; goodwill $1,125,000.
• Buyer's 15-year deductions under Split A: ($1,325,000 + $25,000) ÷ 15 = $90,000 a year.
• Under Split B: ($1,125,000 + $25,000) ÷ 15 = $76,667 a year, plus $200,000 more equipment to depreciate, usually on a faster schedule.
• Seller's cost of Split B: up to $200,000 more of the gain may be taxed at ordinary rates instead of capital-gain rates, depending on the depreciation the seller already took.

The non-compete trap, in numbers: moving $200,000 from goodwill to the non-compete leaves your deduction unchanged at $200,000 ÷ 15 = $13,333 a year. It can turn $200,000 of the seller's capital gain into ordinary income. Don't ask for it. A seller who spots it will ask for more price.

Where these numbers come from: The 15-year amortization of goodwill and non-competes comes from Section 197 of the Internal Revenue Code, and the allocation is reported on IRS Form 8594 by both buyer and seller. The SBA valuation cap, amortization limits and 24-month seller consulting limit are from SOP 50 10 8.1, summarized by Beancount's SOP 50 10 8.1 guide and Cantrell Firm. Tax treatment described here is general. Confirm it for your deal with a CPA. SOP 50 10 8.1 applies to loans that receive an SBA loan number on or after October 1, 2026 (SBA Information Notice 5000-880695).

Related questions

Does purchase price allocation matter in a stock purchase?

Usually not for Form 8594. In a straight stock purchase you generally inherit the company's existing tax basis in its assets. Certain tax elections can treat a stock deal as an asset purchase, and then allocation applies. See asset purchase or stock purchase.

Can the allocation change after closing?

Yes, when the price changes, for example through a working capital adjustment or a released holdback. Each side then files a supplemental Form 8594. Agree in the purchase agreement how adjustments will be allocated.

Who drafts the allocation?

The buyer's CPA usually proposes it, and the seller's CPA reviews it. The final schedule belongs in the purchase agreement, signed by both sides.

Can we allocate whatever we want?

No. Values must be reasonable and supportable at fair market value. Agreeing a split in writing helps, but it does not protect an allocation that ignores reality.

What comes next

The allocation decides how much you can deduct. The entity you buy through decides who gets those deductions and how easily you can add a second business: what kind of entity should you buy a business through?

Related articles

• What kind of entity should you buy a business through?
• What should the seller's non-compete say?
• What do lawyers and accountants cost when you buy a business?
• Asset purchase or stock purchase: which should a buyer choose?
• How do you build a holding company for acquisitions?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.