Selling Your Business: How the Purchase Price Allocation Determines Your Tax Bill

When a business is sold as a going concern (an asset sale rather than a stock sale), the total purchase price must be allocated among the individual assets of the business under IRC 1060 using the “residual method.” This allocation is critically important because different asset classes are taxed at different rates. The allocation follows a seven-class hierarchy established by Reg. 1.338-6, with the residual (remaining purchase price after allocating to identifiable assets) assigned to Class VII (goodwill and going concern value). Both the buyer and seller must file Form 8594 (Asset Acquisition Statement) reporting the allocation, and the IRS compares the two forms for consistency. If the allocations don’t match, both parties face scrutiny. The allocation is a negotiation point in every business sale, because the tax interests of the buyer and seller are directly opposed.

How does the allocation affect the tax bill?

Can I spread the gain from a business sale over multiple years?

If the buyer pays in installments, you can report the gain proportionally under IRC 453 as you receive each payment. The installment method applies automatically to any sale where at least one payment is received after the tax year of the sale. Each payment consists of three components: return of basis (tax-free), gain (taxed at capital gains rates), and interest income (taxed as ordinary income). Dealer dispositions, sales of inventory, and sales of depreciable property to a related party don’t qualify for installment treatment. If you elect out of the installment method (by reporting the full gain in the year of sale), you cannot reverse that election without IRS consent.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.