Purchase Price Allocation: What the Seller Keeps
§ 1060 · Form 8594 · reviewed September 7, 2026
Splits the price of your business among its assets the way the tax form does, and shows the tax on each part and what you keep. AboutLess
In plain words. When a business is sold as its assets, the price is divided among what was sold: inventory, receivables, equipment, real estate, goodwill, a promise not to compete, and sometimes a consulting agreement. Each piece is taxed its own way. Some pieces are ordinary income, taxed like wages. Some are capital gain, taxed at a lower rate. Depreciation you claimed on equipment is taxed back as ordinary income. This tool takes the allocation and your rates, and shows the tax on each piece, the total, and what you keep. A slider moves dollars from the covenant to goodwill so you can see how much the labels are worth.
Why it matters. The allocation is negotiated, and the buyer and the seller want different labels on the same dollars. The seller wants goodwill. The buyer is indifferent between goodwill and a covenant and may prefer consulting pay, which it deducts at once. Seeing the tax on each label is what turns the schedule to the purchase agreement from a formality into a negotiation.
An example. A $3,000,000 price: $150,000 of inventory that cost $100,000, $100,000 of receivables, $300,000 of equipment with $400,000 of depreciation taken, $1,000,000 of real estate with $200,000 of depreciation, $1,200,000 of goodwill, $150,000 for a covenant, and $100,000 of consulting, at 37 percent ordinary and 20 percent on gains: $572,000 of federal tax and $2,428,000 kept, with 20 percent of the price taxed as ordinary income. Moving $100,000 from the covenant to goodwill saves $17,000.
Where it stops. It is for a sole proprietor, partnership, or S corporation, not a C corporation. It uses flat rates you choose, treats goodwill as built rather than bought, assumes straight-line depreciation on the real estate, and leaves out state tax, the payroll or self-employment tax on consulting pay, and an installment note. Everything it leaves out.
Goodwill, going concern value, customer lists, and trade names. Capital gain to you when you built them rather than bought them.
What the buyer pays for your promise not to compete. Ordinary income to you.
Inventory and receivables
Only the amount over cost is taxed.
Equipment and fixtures
From the depreciation schedule. Gain up to this amount is taxed as ordinary income.
Real estate
Gain up to this amount is taxed at up to 25%.
Your pay and your rates
Pay for staying on after the sale. Ordinary income, and payroll or self-employment tax applies on top.
The federal rate on your last dollar of ordinary income in the year of the sale.
The federal rate on long-term gains at your income, 15 or 20 percent for most sellers.
The same price with fewer dollars labeled covenant and more labeled goodwill, to show what the label is worth.
- Taxed as ordinary income
- $600,000
- At 37%. Inventory profit, receivables, equipment depreciation, the covenant, and consulting pay
- Taxed as capital gain
- $1,500,000
- At 20%, plus $200,000 of building depreciation at 25%
- Tax saved by moving $100,000 to goodwill
- $17,000
- $555,000 of tax with the covenant at $50,000 and goodwill at $1,300,000
| Class | Form class | Amount | Your basis, untaxed | Ordinary income | Capital gain | Federal tax |
|---|---|---|---|---|---|---|
| Inventory | IV | $150,000 | $100,000 | $50,000 | $0 | $18,500 |
| Accounts receivable | III | $100,000 | $0 | $100,000 | $0 | $37,000 |
| Equipment and fixtures | V | $300,000 | $100,000 | $200,000 | $0 | $74,000 |
| Real property | V | $1,000,000 | $500,000 | $0 | $500,000 ($200,000 at 25%) | $110,000 |
| Goodwill and other intangibles | VI and VII | $1,200,000 | $0 | $0 | $1,200,000 | $240,000 |
| Covenant not to compete | VI | $150,000 | $0 | $150,000 | $0 | $55,500 |
| Consulting or employment agreement | Not on the form | $100,000 | $0 | $100,000 | $0 | $37,000 |
| Total | $3,000,000 | $700,000 | $600,000 | $1,700,000 | $572,000 | |
The allocation is negotiated, and both sides file the same Form 8594 with it. Every dollar moved from the covenant to goodwill saves you the gap between your two rates, about 17 cents here. The buyer deducts goodwill and a covenant on the same 15-year schedule, so the buyer has little reason to resist that move. Consulting pay is different. The buyer deducts it as paid, which is why buyers ask for it, and you pay ordinary rates plus payroll tax on it. The depreciation you claimed on equipment comes back as ordinary income before any of that class is capital gain.
This follows the federal rules for allocating the price of a business among its assets and taxing each class to a sole proprietor, partnership, or S corporation seller. It assumes goodwill you built rather than bought, straight-line depreciation on the buildings, the equipment's gain taxed as ordinary income up to the depreciation taken, and the flat rates you chose. It leaves out a C corporation, state tax, the payroll or self-employment tax on consulting pay, an installment note, and losses from the year. The allocation goes on Form 8594. Educational, not advice.
This is a simplified model, not your actual tax return or plan. It only knows what you type in, leaves out rules that may apply to you, and cannot weigh the other facts and trade-offs a real decision depends on. Before you act, talk with a professional who knows your whole situation.
Educational only, not investment, tax, or legal advice. Results are hypothetical estimates that vary with each use and over time and are not guaranteed accurate or complete. Using this tool creates no client relationship with Considerate Capital, and the site that linked here is not affiliated with it. By using it you agree to the tool terms.