There are different types of assets in a business that are taxed differently. When a business is sold or when its ownership changes, the buyer and the seller must face tax consequences and file Form 8594 to the IRS to receive their tax returns.If you are looking for more information about Form 8594 and how to go about it, this article is everything you need.
Form 8594: Decoding the Tax Jargon
Some important terms to understand before learning about Form 8594:
1. Fair Market Value:
When a business or trade is offered to the public, it is offered at a reasonable value for an asset. This value is considered fair market value. The fair market value is not affected by mortgage, liens, pledges, or any other liabilities, as it is a gross value.The fair market value is considered to be equal to any non-recourse debt that a property is subjected to. During acquisition, if there are any incurred liabilities, they are not considered at the time of determining the basis of assets.
2. Residual Value:
The buyer and the seller agree on the price for all the assets of the business or trade. Once this price has been agreed upon, the amount must be allocated to each asset in a specific order. The sales price for each asset is allocated using the residual method.The residual method is applied to any transfer of a group of assets that makes up a business or trade. The amount paid for by the assets is used to define the buyer's basis.The buyer and the seller get into a written agreement stating the allocated sales price of each asset group. The agreement is signed by both buyer and seller and is made formal by attaching it with Form 8594. The IRS has the power to determine if the amount allocated for the asset groups is appropriate or otherwise. They can also request for the amount to be revised as they see fit.
What is Form 8594?
When a business is sold, both the buyer and the seller must file form 8594 along with their individual tax returns. Form 8594 is a compliance document created by the IRS to report the sale of a business and allocate asset classes based on the selling price of the business. Form 8594 gives the IRS information regarding the depreciable basis of the assets transferred by the buyer and the determined loss or profit for the seller.The buyer and the seller must attach their IT returns with the form. The group of assets that were transferred in the trade or business must also be filed. The filing must also contain information regarding the buyer’s basis in the assets determined by the amount paid for the assets.
Instructions for filing Form 8594:
The buyer and the seller must use Form 8594 to report a transaction involving goodwill or going-concern value that attaches or may attach to a group of assets of the trade or business. The buyer’s basis is determined solely by the price paid for the purchases.Form 8594 must also be filed when the buyer or seller is updating an original or previously filed supplement form because of an increase or decrease in the cost of assets of the buyer or the amount realized by the seller.The bundle of assets in a trade or business can be in the hands of the buyer, the seller, or both. Irrespective of who is in possession of the assets, both the buyer and the seller are required to file form 8594. If the buyer or seller is a controlled foreign corporation, form 8594 must be attached to form 5471 while filing for returns.Form 8594 must be filed along with the annual income tax returns in the year the sale took place.
Asset Classes on Form 8594
Form 8594 lists 7 different types of assets to which the buyer and the seller files the form:
- Class I Assets- Cash and general deposit accounts.
- Class II Assets- Actively traded personal property, certificates of deposition, and foreign money. It also includes U.S. government securities and publicly traded stock.
- Class III Assets- Debt instruments, accounts receivable, and other assets.
- Class IV Assets- Stock in trade, taxpayer’s property held in inventory or for sale to customers in the course of its trade or business.
- Class V Assets- All assets that are not classified in Class I, II, III, IV, VI, or VII, furniture, fixtures, buildings, land, vehicles, and equipment.
- Class VI Assets- All section 197 intangibles other than goodwill and going-concern value.
- Class VII Assets- Goodwill and going-concern value.
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