Buying or Selling Business Assets - Remember to File IRS Form 8594 & Avoid Future Headaches
Buying and selling business assets can be complicated. The last thing you want - BELIEVE ME - is the hassle of explaining inconsistent treatment of the sale for tax purposes 3 YEARS INTO THE FUTURE. Avoiding this is simply accomplished by remembering to file one extra tax form. Basically the US tax law requires both the seller and purchaser of a group of assets that makes up a trade or business to file IRS Form 8594 to report the sale if:
1. Goodwill or going concern value attaches, or could attach, to such assets.
2. The purchaser's basis in the assets is determined only by the amount paid for the assets. In other words no other substantiation of market value ...
A couple of quick lessons learned
1. Many practitioners, particularly UNLICENSED PRACTITIONERS are failing to file this document that can prove most crucial three or even six years from today. This form has been defined as substantial in assessing the quality of your tax prep services. By that I mean if your tax practitioner hasn't prepared it for you and you buy/sell business assets then you have a sub par tax prep service. CHECK YOURSELF.
2. To properly defend yourself IRS Form 8594 can and should be amended if corrections are needed. I think the key to note here is that all parties involved in a transaction of business assets should agree to exactly how this form is prepared AS PART OF THE TRANSACTION. There isn't too much speculation required to see that with the IRS' new modenized efiling system (MeF) this form between the parties is destined to become a systematic match prompting further scrutiny if not tied out line item by line item.
Generally, both the purchaser and seller must file Form 8594 and attach it to their income tax returns (Forms 1040, 1041, 1065, 1120, 1120S, etc.) when there is a transfer of a group of assets that make up a trade or business and the purchaser's basis in such assets is determined wholly by the amount paid for the assets.
If the purchaser or seller is a controlled foreign corporation (CFC), each U.S. shareholder should attach Form 8594 to its Form 5471.
Two Exceptions to the filing requirement
1. A group of assets that makes up a trade or business is exchanged for like-kind property in a transaction to which section 1031 applies. If section 1031 does not apply to all the assets transferred Form 8594 is required for the part of the group of assets to that section 1031 does not apply. For information about such a transaction, see Regulations sections 1.1031(j)-1(b) and 1.1060-1(b)(8).
2. A partnership interest is transferred. See Regulations section 1.755-1(d) for special reporting requirements. However, the purchase of a partnership interest that is treated for federal income tax purposes as a purchase of partnership assets, which constitute a trade or business, is subject to section 1060. In this case, the purchaser must file Form 8594. See Rev. Rul. 99-6, 1999-6, I.R.B. 6, available at http://www.irs.gov/pub/irs-irbs/irb99-06.pdf.