IRS Form 8594 — asset allocation for buyers.

IRS Form 8594 is the asset-allocation document required for asset purchases. Both buyer and seller file the form with their tax returns; the IRS expects matching allocations. The allocation drives both buyer's tax basis (and consequently the depreciation/amortization schedule that affects future-year tax) and seller's character of gain (ordinary vs. capital, with significant rate differences). Mishandled at close, Form 8594 surfaces as IRS dispute years later.

From cash to goodwill.

Form 8594 organizes asset allocation into seven classes. Each class has its own tax treatment.

• Class I — Cash and equivalents. Cash, bank deposits, demand-deposit accounts. Straightforward; the value at close equals the cash transferred.
• Class II — Actively traded personal property. Stocks, bonds, marketable securities. Rarely material in agency M&A.
• Class III — Accounts receivable. Premium receivables, commission receivables, other amounts due. Valued at face less any allowance for uncollectables.
• Class IV — Inventory. Not typically applicable in agency M&A; agencies don't hold inventory in the traditional sense.
• Class V — Tangible assets. Furniture, fixtures, equipment, leasehold improvements, computer hardware. Valued at fair-market value at close, not depreciated book value.
• Class VI — Section 197 intangibles other than goodwill. Customer lists, non-compete covenants, workforce in place, going-concern value. Amortizable over 15 years; significant for both buyer's depreciation and seller's ordinary-vs-capital treatment.
• Class VII — Goodwill and going-concern. Residual after Class I through Class VI. The largest class in most agency deals; the most negotiable.

Buyer-side and seller-side incentives.

The buyer and seller have opposite incentives on Form 8594 allocation. Buyers prefer more weight in Class V (faster depreciation) and Class VI (15-year amortization). Sellers prefer more weight in Class VII (long-term capital-gains treatment on goodwill).

Drafted, agreed, filed in unison.

Best practice is to negotiate the Form 8594 allocation as part of the purchase agreement, attaching the allocation as an exhibit. Three mechanics matter.

• Pre-close negotiation. The allocation gets negotiated alongside other purchase-agreement terms in the final weeks. Last-minute allocation disputes after close are operationally difficult and create tax-return-filing pressure on both sides.
• Reasonable basis. Allocations need to have reasonable basis — the buyer's allocation can't claim $300K of restrictive-covenant value when the actual covenants are limited 12-month non-solicits. The IRS can challenge unreasonable allocations even when both parties agree.
• Matched filings. Both buyer and seller file Form 8594 in the year of close (with the income-tax return for the year of close). Matched allocations protect both sides against IRS challenge.

Subsequent adjustments — installment payments, earnouts, contingent purchase-price changes — require Form 8594 amendment in the year of the adjustment. The allocation isn't entirely fixed at close; later changes flow through to subsequent-year amendments.

The Form 8594 layer sits under the purchase-agreements work in the legal-architecture cluster. Its tax-mechanics depth makes it worth dedicated treatment. The Pillar — Legal Architecture — covers the broader framework.