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What Is Form 8594
Form 8594 is a form used by the Internal Revenue Service (IRS) called “Asset Acquisition Statement”.
This form is required under Section 1060 of the Internal Revenue Code.
In essence, when you buy or sell a small business, the buyer and seller will need to deal with the tax consequences of such a transaction.
The buying and selling entities must fill out Form 8594 Asset Acquisition Statement when filing their tax returns in the fiscal year the business was sold and purchased.
The main objective of IRS 8594 is to disclose the buyer’s depreciable basis in the assets sold and the seller’s gain or loss on the sale.
The reason why you need to file the IRS Form 8594 is for a buyer and seller of a “group of assets” that make up a business to report the sale and purchase to the tax authorities if the purchaser’s basis in the assets is determined only by the amount paid for the assets.
Form 8594 should also be filed if the buyer and seller are amending an initially filed form.
Who Must File
Both buyers and sellers to a transaction where there is a transfer of a group of assets making up a “trade” or a “business” should complete this form and attach it to their income tax returns (Form 1040, 1041, 1065, 1120, 1120S and so on).
However, the in the following cases, you are exempt from filing the form:
- When a group of asset is transferred making up a trade or business in exchange for like-kind property where Section 1031 of IRC applies
- Partnership interests that is transferred
When To File
You’ll need to file the tax form 8594 along with your income tax return applicable to the year that the sale and purchase of the assets took place.
For example, if you sold your business this year, you’ll need to file 8594 form that applies to this tax year.
Form 8594 Overview
Let’s look at the Asset Acquisition Statement Form 8594 to see what it consists of.
The form is divided into three parts, as follows:
- Part 1: General Information
- Part 2: Original Statement of Asset Transferred
- Part 3: Supplemental Statement
The general information in Part 1 provides information about the other party to the transaction.
Part 2 of the form provides the different types of asset classes going from Asset Class I to VII.
Part 3 of the form is supplemental information that you can provide on if an original statement or previous supplemental information was filed because of an increase or decrease in the consideration received.
Let’s now look at certain key concepts you need to understand to be able to complete Form 8594.
Form 8594 Asset Classes
There are different asset classes identified on tax 8594 form that you need to understand so you can properly classify the assets purchased or sold.
Here is a quick overview of the different asset classes:
- Asset Class I: cash and general deposit accounts
- Asset Class II: certificates of depositions, US government securities, stocks, securities
- Asset Class III: accounts receivable, debt instruments, and other assets
- Asset Class IV: property in your inventory or held for sale in normal course of business
- Asset Class V: all other assets that are not in asset classes I, II, III, IV, VI, and VII such as equipment, automobile, furniture
- Asset Class VI: Section 197 intangibles other than goodwill and going concern value
- Asset Class VII: Goodwill and going concern value
Form 8594 Trade or Business
“Trade” or “business” is defined as a group of assets that you can attach goodwill or going concern value to it.
If a group of assets qualifies as a “trade” or “business” under Section 355 IRC relating to the distribution of stock in controlled corporations, then those assets will trade or business for the purpose of Form 8594.
Here are some factors that you can use to assess if there’s goodwill or going concern value that can attach to the group of assets:
- If you have Section 197 intangible assets
- If you have an excess of the total paid for the assets in relation to the aggregate book value of the assets
- If you have a license, lease agreement, non-compete covenant, management contract, employment contract, or similar agreements between purchase and seller
Form 8594 Consideration
The purchaser’s consideration is how much it pays for the assets or the cost.
The seller’s consideration is how much it realizes in selling the assets.
Form 8594 Fair Market Value
The fair market value of the assets represents the total value of the assets without deducting any outstanding mortgages, debt, liens, pledges, or other types of associated liabilities.
Form 8594 Instructions
On top of the form, you’ll need to identify your company name as it appears on your tax return along with your company’s identification number.
You’ll check the box “Purchaser” or “Seller” depending on whether you were the buyer or seller of the business.
Part I General Information
In Form 8594 Part I, you’ll need to enter:
- Name of other party
- Address of other party
- Tax ID Number of the other party (EIN for companies, SSN for individuals)
- Date the sale and purchase took place
- Total consideration received or paid for the assets
Part II Asset Transferred
Part II of IRS Form 8594, you’ll need to:
- Provide the total fair market value for each particular asset class
- For Asset Class IV and VII, enter the total market value combined and the total portion of the sales price allocated to each class
Part III Supplemental Information
Part III of Form 8594 has to be filed whenever there is an increase or decrease of the consideration of the assets transferred.
In this case, you’ll need to:
- Give the reason why the consideration was increased or decreased
- Enter the tax year and form number that was originally filed
The IRS provides Form 8594 instruction to help you complete the form as well.
Form 8594 Example
Let’s look at an example of how a buyer or seller may file Form 8594.
Imagine that Company A purchases all of the assets of Company B for a total consideration of $1,000,000.
In this transaction, the $1,000,000 is allocated as follows:
- $100,000 in cash
- $600,000 in inventory
- $200,000 in equipment
- $100,000 in goodwill
In this case, the buyer and seller will need to complete Form 8594 and report the following:
- Class I assets for $100,000 (cash)
- Class IV assets for $600,000 (inventory)
- Class V assets for $200,000 (equipment)
- Class VII assets for $100,000 (goodwill)
If the transaction was performed this year, Form 8594 must be filed by the buyer and seller when they file their income tax returns covering this tax year.
Form 8594 Penalties
Buyers and sellers who sell assets that are considered as trade or business have a obligation to file Form 8594.
If you do not file the required tax form and comply with your tax obligations, you will be exposed to penalties as per the tax code sections 6721 to 6724:
- Section 6721. Failure to file correct information returns
- Section 6722. Failure to furnish correct payee statements
- Section 6723. Failure to comply with other information reporting requirements
- Section 6724. Waiver; definitions and special rules
- Section 6725. Failure to report information under section 4101
It’s your obligation to assess if the sale of a particular set of assets can qualify as the sale or purchase of a trade or business.
If that’s the case, you will need to file the necessary forms and provide the IRS with the necessary information relating to the transaction.
IRS Form 8594 Takeaways
So there you have it folks!
Are you looking for the 8594 instructions form?
Need a Form 8594 example to better understand how to complete it?
In essence, the IRS 8594 form is used to report the sale and the purchase of assets composing a business.
Both the buyer of the business and the seller must complete the tax form 8594 on their individual tax returns providing the IRS with the following information:
- The buyer’s depreciable basis in the assets sold
- The determination of the seller’s gains or losses
This form is filed essentially where you sell a group of assets that represent:
- A trade or business
- Consideration is exchanged
- Goodwill or going concern value is attached to the assets
If you are looking to buy or sell a company, be sure to consult with a tax attorney, M&A lawyer, or legal professional to get advice on the specifics of your transactions.
Remember, this article is intended to give you general information so you can get started in your research.
I hope I was able to explain to you what is Form 8594, why you need to complete one, what it entails, and how it works.
Let’s look at a summary of our findings.
Understanding Form 8594
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