Purchase Price Allocation: What the Seller Keeps
Of the price for my business, how much is taxed as ordinary income, how much as capital gain, and what do I keep? Every piece below can be linked to, so it opens in a window on your reader's screen, current as of the record. No form to fill in.
2026 law · Reviewed September 7, 2026 · The full page, with methodology and sources · the terms · All tools
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The allocation to each class with the basis and depreciation behind it, and your rates; the tax on each class, the total, what you keep, the ordinary and capital shares, and the what-if of moving dollars from the covenant to goodwill. In a frame it carries no cookies, no tracking, and a visible link back to the methodology. Your site has to allow frames; most do. The link that opens it in a small window is on the professionals page.
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- 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.
The facts
Six quotable sentences on allocating the price of a business among its assets.
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- 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 to a pass-through seller
The seven classes in allocation order, with the seller's treatment and the buyer's.
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| 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 |
Cite and link.
The clean address, a citation generated from the record so it can never carry a stale review date, and an address for every section so you can point a reader at the exact table or method.
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- Link
- https://consideratecapital.com/tools/purchase-price-allocation
- Citation
- Considerate Capital, "Purchase Price Allocation: What the Seller Keeps," reviewed September 7, 2026, https://consideratecapital.com/tools/purchase-price-allocation.
Link to a section
- The calculator https://consideratecapital.com/tools/purchase-price-allocation#calculator
- The facts https://consideratecapital.com/tools/purchase-price-allocation#facts
- The classes https://consideratecapital.com/tools/purchase-price-allocation#key-numbers
- How the allocation is taxed https://consideratecapital.com/tools/purchase-price-allocation#how-it-works
- Methodology https://consideratecapital.com/tools/purchase-price-allocation#methodology
- Sources https://consideratecapital.com/tools/purchase-price-allocation#sources
- Revision history https://consideratecapital.com/tools/purchase-price-allocation#revision-history
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