Business Sale Structure: Asset vs. Stock and Purchase Price Allocation

The structure of your business sale fundamentally changes your tax outcome. Learn how asset sales differ from stock sales and why purchase price allocation matters.

Asset sale versus stock sale is the threshold question. In a stock sale, you sell your ownership interest and generally pay capital gains tax on the entire amount. In an asset sale, each asset class is taxed differently: inventory and accounts receivable may generate ordinary income, while goodwill generates capital gains. Buyers usually prefer asset sales for the step-up in basis; sellers usually prefer stock sales for the simpler capital gains treatment.

Form 8594 governs allocation. Under Section 1060, buyer and seller must both file Form 8594 and agree on how the purchase price is allocated across seven asset classes. Disagreements with the IRS on allocation can reclassify capital gains as ordinary income.

Earn-outs and seller financing add complexity. Contingent payments may be treated under the installment method (Section 453) or as compensation. Seller-financed notes generate interest income in addition to the gain on sale.

The tradeoff: What looks like a higher sale price can produce a lower after-tax result if the allocation is unfavorable. A CPA can model the after-tax proceeds under different deal structures so you negotiate with real numbers.