A quiet tool

Same price. Different labels. Different tax.

When a business is sold as its assets, every dollar of the price gets a label, and the label sets the tax. Enter the allocation and your rates and see the tax on each class, what you keep, and what moving dollars between labels is worth.

§ 1060; Reg. § 1.338-6(b); §§ 1245, 1250, 197 · Last reviewed September 7, 2026 · Facts · The table · Methodology

https://consideratecapital.com/tools/purchase-price-allocation

Allocated to goodwill and other intangibles

Goodwill, going concern value, customer lists, and trade names. Capital gain to you when you built them rather than bought them.

Allocated to a covenant not to compete

What the buyer pays for your promise not to compete. Ordinary income to you.

Inventory and receivables

Allocated to inventory

What the inventory cost you

Only the amount over cost is taxed.

Allocated to accounts receivable

How you report income

Cash basis, not yet reportedAccrual basis, already reported

A cash-basis seller has not reported the receivables yet, so they are ordinary income now. An accrual-basis seller already has.

Equipment and fixtures

Allocated to equipment and fixtures

What the equipment cost you

Depreciation taken on the equipment

From the depreciation schedule. Gain up to this amount is taxed as ordinary income.

Real estate

Allocated to land and buildings

What the real estate cost you

Depreciation taken on the buildings

Gain up to this amount is taxed at up to 25%.

Your pay and your rates

Consulting or employment agreement

Pay for staying on after the sale. Ordinary income, and payroll or self-employment tax applies on top.

Your ordinary income rate

The federal rate on your last dollar of ordinary income in the year of the sale.

Your capital gains rate

The federal rate on long-term gains at your income, 15 or 20 percent for most sellers.

Would the 3.8% investment income surtax apply to the gains?

No, I ran the businessYes, I was a passive owner over the threshold

Gains on the assets of a business you ran day to day are outside the surtax. A passive owner's are inside it.

What if: move this much from the covenant to goodwill

The same price with fewer dollars labeled covenant and more labeled goodwill, to show what the label is worth.

What you keep after federal tax

$2,428,000

The price is $3,000,000 and the federal tax on it is $572,000. 20% of the price is taxed as ordinary income and 57% as capital gain. The remaining $700,000 returns what the assets cost you and is not taxed.

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

Each class of the allocation, how it is taxed, and the tax
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.

Built by Joshua Mangoubi, CFA, MBA. By using this tool you agree to the tool terms, which include that results vary with each use and over time. Cite this tool, or take a table or chart

How it counts. Each class taxed its own way to a pass-through seller: inventory over cost and unreported receivables as ordinary income, equipment as ordinary up to the depreciation taken and capital above it, buildings with their depreciation at up to 25 percent, goodwill as capital gain, a covenant and consulting pay as ordinary income. The totals, the split of the price, and a what-if moving dollars from the covenant to goodwill.

What it assumes. A sole proprietor, partnership, or S corporation seller, goodwill built rather than bought, straight-line depreciation on the buildings, and flat rates. A C corporation, purchased intangibles with basis, a note, or state tax changes the arithmetic, and the depreciation figures should come from the depreciation schedule, which is a CPA's file to open.

Where we fit in. We integrate tax considerations into your investment strategy and collaborate with estate attorneys and CPAs to ensure your plan is coordinated. We are not a law firm or accounting firm, so we do not provide legal or tax advice. Everything in this material is for educational purposes, based on primary sources. Before taking any action, please consult the appropriate professionals to apply these ideas to your situation.

The facts, in one place.

Six quotable sentences on allocating the price of a business among its assets.

The sale of a business is the sale of each asset separately, and the price is allocated among seven classes by the residual method: cash, traded securities, receivables, inventory, everything else, section 197 intangibles other than goodwill, and finally goodwill and going concern value (§ 1060(a); Reg. §§ 1.1060-1(c), 1.338-6(b)).
Both the buyer and the seller report the allocation on Form 8594, and a written allocation agreed between them binds both unless the Service finds it unreasonable (§ 1060(a), (b)). The two forms are expected to match.
To the seller, inventory and a cash-basis seller's receivables are ordinary income; equipment is ordinary up to the depreciation taken and capital gain above it (§§ 1245, 1231); a building's straight-line depreciation is taxed at up to 25% and the rest is capital gain (§ 1(h)(1)(E), (h)(6)); goodwill is capital gain.
A covenant not to compete is ordinary income to the seller and is amortized by the buyer over 15 years, the same schedule as goodwill (§ 197(d)(1)(E), (f)(3)). So the buyer is indifferent between the two for its deductions, and the seller is not: that is the tension in the allocation.
Example: a $3,000,000 price with $1,200,000 of goodwill, $150,000 for a covenant, and $100,000 for consulting, at 37% ordinary and 20% on gains: $572,000 of federal tax, $2,428,000 kept, with 20% of the price taxed as ordinary income. Moving $100,000 from the covenant to goodwill saves $17,000.
Pay for a consulting or employment agreement is ordinary income and is also subject to payroll or self-employment tax, and it is deductible to the buyer as paid rather than over 15 years. It is compensation, not part of the Form 8594 allocation.

How each class is taxed.

The seven classes in allocation order, with the seller's treatment and the buyer's.

The Form 8594 classes and the seller's tax on each, for a sole proprietor, partnership, or S corporation (§ 1060; Reg. § 1.338-6(b); §§ 1245, 1250, 1231, 197)
Class	What is in it	Seller's tax	Buyer's deduction
I	Cash and deposit accounts	None	None
II	Traded securities, certificates of deposit	Gain over basis, capital	Basis in the securities
III	Accounts receivable	Ordinary if cash basis; none if already reported	Collected against basis
IV	Inventory	Ordinary income over cost	Cost of goods sold when sold
V	Equipment, fixtures, vehicles	Ordinary up to depreciation taken, then capital	Depreciation, often immediate
V	Land and buildings	Depreciation at up to 25%, then capital	Depreciation over decades; land none
VI	Covenant not to compete	Ordinary income	Amortized over 15 years
VI	Customer lists, trade names, licenses	Capital gain (self-created) or recapture (purchased)	Amortized over 15 years
VII	Goodwill and going concern value	Capital gain	Amortized over 15 years
Not on the form	Consulting or employment agreement	Ordinary income plus payroll or self-employment tax	Deducted as paid

How the allocation is taxed.

The Code does not see a business sold; it sees each asset sold, and the price must be divided among them. Section 1060 borrows the residual method from the stock-purchase rules: the price is allocated class by class in order, cash first, then securities, receivables, inventory, and the tangible property, then the identifiable intangibles, and whatever is left is goodwill and going concern value. Both parties report the split on Form 8594, and an allocation they agreed in writing binds both of them. The Service expects the two forms to match, and a mismatch is a common audit trigger.

To a pass-through seller each class carries its own character. Inventory and unreported receivables are ordinary income. Equipment gives back its depreciation as ordinary income before any capital gain; a building gives back its straight-line depreciation at up to 25%; goodwill built rather than bought is capital gain with no basis at all. A covenant not to compete is ordinary income to the seller but, to the buyer, is amortized over the same 15 years as goodwill, so the seller has a reason to shift dollars from the covenant to goodwill and the buyer has little reason to object. A consulting agreement is the real tension: the buyer deducts it as paid, the seller pays ordinary rates plus payroll tax. The calculator shows what each label costs.

Methodology.

Inputs. The amount allocated to inventory (with its cost), receivables (with the seller's method of accounting), equipment (with cost and depreciation taken), real property (with cost and depreciation taken), goodwill and other section 197 intangibles, a covenant not to compete, and a consulting or employment agreement; the ordinary and gains rates; the surtax; and the what-if shift.
Character by class. Inventory over cost and a cash-basis seller's receivables as ordinary income; equipment gain as ordinary up to the depreciation taken (§ 1245(a)) and section 1231 gain above it; real property gain as unrecaptured section 1250 gain up to the depreciation taken (§ 1(h)(6)), at the lesser of the ordinary rate and 25% (§ 1(h)(1)(E)), and capital gain above it; goodwill as capital gain with no basis; the covenant and the consulting pay as ordinary income.
The surtax. Added to the rate on every gain from property when it applies (§ 1411(c)(1)(A)(iii)); not to the covenant or the consulting pay, which are not investment income.
The totals. Tax per class and in total; the price split into ordinary income, unrecaptured section 1250 gain, capital gain, and return of basis; what the seller keeps; and the same sale with the shift applied, with the saving per dollar moved.
Validation. The example pinned by hand for every class (18,500; 37,000; 74,000; 110,000; 240,000; 55,500; 37,000, total 572,000), the shift saving 17 cents on the dollar, the accrual case, the surtax difference, and the 25 percent ceiling at a low ordinary rate. A transcription error fails the build.
Not modeled. A C corporation seller, purchased goodwill with basis and amortization recapture, section 1250 ordinary recapture on accelerated depreciation, the section 1231 five-year lookback, payroll and self-employment tax on the consulting pay, an installment note, state tax, and the buyer's side. Educational, not advice.

Sources.

1. United States Code (Cornell LII), 26 U.S.C. § 1060 — Special allocation rules for certain asset acquisitions. That the consideration in an applicable asset acquisition is allocated among the assets by the residual method of § 338(b)(5) (a); that both the buyer and the seller report the allocation to the Service (b), on Form 8594; and that a written allocation agreed between the parties binds both of them unless the Service determines it is not appropriate (a). Retrieved September 7, 2026; verified September 7, 2026.
2. Code of Federal Regulations (Cornell LII), 26 CFR § 1.338-6 — Allocation of ADSP and AGUB among target assets. The seven asset classes of the residual method and their order: Class I cash and general deposit accounts, Class II actively traded personal property and certificates of deposit, Class III debt instruments and receivables, Class IV inventory, Class V everything else, Class VI section 197 intangibles other than goodwill and going concern value, Class VII goodwill and going concern value (b). Reg. § 1.1060-1(c) applies these classes to an applicable asset acquisition. Retrieved September 7, 2026; verified September 7, 2026.
3. Internal Revenue Service, About Form 8594, Asset Acquisition Statement Under Section 1060. The statement both the buyer and the seller attach to their returns for the year of the sale, reporting the sale price allocated among the seven classes, and the requirement to file a supplemental statement when the price changes later. Retrieved September 7, 2026; verified September 7, 2026.
4. United States Code (Cornell LII), 26 U.S.C. § 1245 — Gain from dispositions of certain depreciable property; § 1250 — Gain from dispositions of certain depreciable realty. That gain on depreciable personal property is ordinary income up to the depreciation taken (§ 1245(a)); that gain on real property is ordinary only to the extent of depreciation beyond straight line (§ 1250(a)); and, with § 1(h)(1)(E) and (h)(6), that the straight-line depreciation on real property is unrecaptured section 1250 gain taxed at up to 25 percent. Retrieved September 7, 2026; verified September 7, 2026.
5. United States Code (Cornell LII), 26 U.S.C. § 197 — Amortization of goodwill and certain other intangibles. That a buyer amortizes goodwill, going concern value, and a covenant not to compete entered into in connection with the acquisition of a business ratably over 15 years (a), (d)(1)(E); and that a covenant is treated as a section 197 intangible whatever its stated term (f)(3). Retrieved September 7, 2026; verified September 7, 2026.
6. Internal Revenue Service, Publication 544, Sales and Other Dispositions of Assets. The Service's statement that the sale of a business is the sale of each asset separately, that gain on inventory and receivables is ordinary income, that depreciation recapture on equipment is ordinary, that the excess is section 1231 gain, that unrecaptured section 1250 gain is taxed at up to 25 percent, and that a payment for a covenant not to compete is ordinary income to the seller. Retrieved September 7, 2026; verified September 7, 2026.
7. United States Code (Cornell LII), 26 U.S.C. § 1411 — Imposition of tax (net investment income). That the 3.8 percent surtax reaches interest and net gain from the disposition of property (c)(1)(A), except property held in a trade or business in which the taxpayer materially participates (c)(1)(A)(iii), (c)(2); so the sale of a C corporation's stock is within it, and the sale of an active owner's business assets is generally outside it. Retrieved September 7, 2026; verified September 7, 2026.

Revision history.

The record's history.

September 7, 2026: First release: the installment sale of a business (§ 453, with recapture in the year of sale and the § 453A line stated), the asset-or-stock double tax on a C corporation (§§ 11, 331), and the purchase price allocation by class (§ 1060, Form 8594).

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