In an asset sale, the buyer and seller must agree on how the purchase price is allocated across asset categories. This allocation is filed by both sides on IRS Form 8594 and has real, opposing tax consequences.
The seven asset classes (Class I–VII), simplified:
- Class I: Cash and cash equivalents.
- Class II: Actively traded personal property (rare in route deals).
- Class III: Accounts receivable (rarely transferred in route deals).
- Class IV: Inventory (your chemicals on hand).
- Class V: Tangible assets (truck, trailer, equipment).
- Class VI: Intangibles other than goodwill (non-compete, software subscriptions, customer list, contracts).
- Class VII: Goodwill and going-concern value.
The buyer wants allocation weighted toward equipment (Class V) and shorter-life intangibles, these depreciate or amortize faster, generating bigger tax shields in early years. Goodwill (Class VII) amortizes over 15 years, slow.
The seller wants allocation weighted toward goodwill, usually taxed as capital gains at favorable rates. They want to avoid allocation to:
- Inventory (taxed as ordinary income).
- Equipment (recaptured depreciation taxed as ordinary income up to original basis, IRC §1245).
- Non-compete agreement (taxed as ordinary income).
A typical $300,000 route allocation might look like:
- Class IV (chemical inventory): $1,500
- Class V (truck, trailer, equipment): $25,000 (subject to depreciation recapture if previously depreciated)
- Class VI, Non-compete: $5,000
- Class VI, Customer list / records: $40,000
- Class VI, Software subscription transfer: $500
- Class VII, Goodwill / going concern: $228,000
Both parties file Form 8594 with their tax returns showing the same allocation. Disagreement triggers IRS attention.
Practical negotiation tips:
- Spell out the allocation in the purchase agreement, not as a side letter.
- Get your CPA's input on the marginal tax effect of swapping $20k between buckets, it's often $5–10k of real money.
- For depreciation recapture, the seller should ask the buyer for an asset-class breakdown the buyer's CPA actually wants, sometimes the buyer doesn't care about $5k more goodwill in exchange for $5k less equipment, and you both win.
- Non-compete value is often a flashpoint. Buyers want it high (deductible over the term); sellers want it low (ordinary income). $5,000 is a typical compromise on a $250–500k deal.
The consulting agreement. Often structured separately as a year-1 expense for the buyer and ordinary income for the seller. Don't bury this in the allocation, keep it as a clean line item with defined hours and a fee.
Disclaimer. Form 8594 mechanics, depreciation recapture rules, intangible amortization, and capital-gains treatment are governed by the Internal Revenue Code and are subject to interpretation, change, and your specific facts. Every allocation should be reviewed by a CPA before signing, and we are not your tax advisor.