The short version
- Allocation is the agreed split of the price across the assets
- Goodwill is the leftover after the other categories
- Buyer and seller each file Form 8594, and the numbers should match
- Settle allocation before you sign, not later
What Allocation Means
Most small and mid sized company sales are asset sales. The buyer takes equipment, inventory, contracts, a non compete promise and goodwill. The purchase agreement assigns part of the price to each.
Goodwill is the residual, what remains after the other categories are valued.
Why the Split Matters
Different asset types can be taxed differently for the seller. A simple picture: a one million dollar sale on five hundred thousand of book value leaves about five hundred thousand of gain.
The tax rate on that gain depends on how each piece is categorized and on your bracket, which is why the split deserves a model, not a guess.
Selling equipment above its book value can trigger depreciation recapture. Your CPA should model the split before the letter of intent.
Buyer and Seller Want Different Things
Buyers like allocations that depreciate quickly. Goodwill is written off over a long period, generally fifteen years under current federal rules, which you should verify. That tension is why both sides negotiate the percentages.
What Each Category Usually Covers
Equipment and vehicles are valued near what they would fetch used. Inventory is valued at cost or market.
A non compete promise gets its own slice, since it is a real thing the buyer pays for. Goodwill takes the rest and reflects your customers, your name and your trained staff.
A buyer who wants a bigger share on short lived assets may offer a better price elsewhere in the deal. Ask your CPA what each trade does to your net.
Form 8594
Both buyer and seller report the allocation to the IRS on Form 8594. The filings should agree. A mismatch can raise audit questions.
A Checklist for Sellers
- Ask your CPA for a model of each allocation before the offer
- Decide which non business assets, like personal vehicles, stay with you
- Write the allocation into the contract, never leave it to be decided later
- Discuss installment payments, which can spread the tax
Your Entity Matters
Some tax tools apply only to certain stock sales and not to LLC or S corporation asset sales. Think about structure well before a sale is on the table.
After the sale, close the entity properly with the certificate of cancellation steps. For how buyers fund the price, read how buyers pay. Then request a valuation.
This page is not tax or legal advice. Confirm with your CPA or attorney.