Form 8594 & Covenant to Not Compete

[doodlemars]

When completing Form 8594, is the value of the covenant to not compete added to the sale price then allocated to Class VI?

For example: $1,000,000 sale and $50,000 non-compete. Would the sale reported in Part I, 3 now be $1,050,000 with the non-compete allocated under Part II, Class VI and VII?

Is there a generic statement format for the attachment, or any specifications that are required on the statement? 

[ColeenD3]

Yes, you would include the price of the non-compete in the total and then allocate it to Class VI.

You don't need to add anything additional to the form. Form 8594 tells the IRS what they need to know.

[doodlemars]

Section 6 says:

If “Yes,” attach a statement that specifies (a) the type of agreement and (b) the maximum amount of consideration (not including interest) paid or to be paid under the agreement. See instructions.

So we would not need to follow those instructions if it's included in the allocations under Part 2?

[Rick19744 · Accepted solution]

I believe we need to clarify a few points:

• The form 8594 can include a covenant not to compete
• Having said that, typically this is a separate agreement between the buyer and seller since it is the seller that is entering into the non compete.
• If the business will continue, and the business is entering into the non compete, then this should be included in Class VI.  In addition, you do need to answer question 6 "yes" and then include the information requested with the tax return.
• If the business is not continuing, then as stated previously, this non compete should technically be a separate agreement with the owner; this is the individual who the buyer does not want to compete.  This is ordinary income to the seller.

[doodlemars]

That completely answers my question regarding allocation, and I thank you for taking the time to explain that. As for the required attached statement explaining the type of agreement and amount, is there a standard format used for statements, or are general business letters used?

[Rick19744]

A simple attachment titled "Form 8594 Question 6 Detail" would be fine.

Then just note what is requested:

• Item a - covenant not to compete
• Item b - show the amount to be paid

The attachment should be headed with the name and EIN of the business in case this gets separated from the tax return.