What do the § 1060 classes actually hold on a plant file?
Class I is cash and cash equivalents — usually excluded in a cash-free deal. Class II is actively traded personal property. Class III is accounts receivable. Class IV is inventory. Class V is everything else that is not an intangible — machinery, equipment, furniture, vehicles, and often buildings and land if they are in the asset deal. Class VI is § 197 intangibles other than goodwill and going concern. Class VII is goodwill and going-concern value.
The manufacturing argument lives between Class V and Classes VI/VII. Buyers want depreciable iron. Sellers often want capital-gain intangibles. Both can be true at once, which is why the form exists and why inconsistent filings are how audits start. Both sides file.
This page will not freeze a bonus-depreciation percentage and will not treat § 179 as a current-year number. Those rules move. A CPA in the closing year owns them. Do not recycle a 2022-era slogan as if it were still the law.
| Class | Typical plant contents | Why the number fights | Document that should match |
|---|---|---|---|
| III | Eligible AR | Aging vs face | Peg exhibit |
| IV | Eligible raw / WIP / FG | E&O and ownership kicks | Close physical |
| V | M&E, furniture, often RE | Buyer depreciation vs seller gain | M&E appraisal + RE allocation |
| VI | Workforce, covenants, some IP | Intangible vs iron | APA schedules |
| VII | Goodwill / going concern | Seller capital-gain preference | Residual after the other classes |
The peg and the inventory count should produce the Class III and IV stories. If they do not, you will argue twice.
How should an M&E appraisal inform the fight without pretending to end it?
Machinery and equipment appraisals come in written standards: FMV in continued use, orderly liquidation value, forced liquidation. Those are not tax book and not the 8594 number unless both sides agree they are. An OLV that exceeds earnings value can put you in an asset-aware deal you should have admitted earlier. An FMV-in-use that the buyer wants to drop entirely into Class V is a negotiation, not a statute.
SBA 7(a) still caps at $5 million and still wants a supported business valuation on change-of-ownership debt (Source: SBA). The appraisal that supports the loan is a credit document. It is not automatically the allocation schedule. Confusing them is how a seller signs a form that surprises their CPA in March.
Real estate, if it is in the deal, is often carved out of the operating multiple and priced on its own stack. Do not let a plant cap-rate conversation silently steal Class V dollars from the cells, or the reverse.
When should the LOI freeze a framework so December does not slip?
Write that the deal is an applicable asset acquisition, that both sides will file Form 8594, and that a CPA exhibit will allocate among the classes. Write whether an M&E appraisal will be a reference or a cap on Class V. Write that inventory will follow the peg definition. Waiting until the week of close is how relationships burn and wires miss a year-end.
IBBA's 83% three-offer statistic on >$5 million files (Source: IBBA) is a process fact. Competing buyers who disagree on Class V by a few hundred thousand dollars are offering different after-tax deals even if the headline matches.
Main Street manufacturing in BizBuySell's 2021–2025 set cleared at 2.75x median SDE on about $268k earnings (Source: BizBuySell / Iconic). On an sde-under-1m job shop, a $120,000 swing from VII into V is not rounding. On an ebitda-1-3m precision file talking a synthesized 5.0x–6.5x EBITDA band, the swing is larger and still not tax advice.
What must you not do on bonus depreciation, sales tax, or a stock wrapper?
Do not publish or handshake a bonus-depreciation percentage as if it were permanent. Verify the current-year rule with a CPA. Do not assume a manufacturing-equipment purchase exemption applies to a bulk transfer of used iron — occasional-sale and successor-tax statutes are different questions in the closing state.
Do not assume a stock sale has no allocation conversation. Some files layer an election. Counsel decides. Jason Taken will not draft it.
Stanford's $16 million / ~6.2x / ~25% margin median (Source: Stanford GSB) describes search-fund files that always have a CPA in the room. That median is never a job-shop multiple and never a reason for a 14-person shop to skip the exhibit.
What does an illustrative Class V versus VII argument look like?
Illustrative only — not a listing and not a tax opinion.
Asset deal on an sde-under-1m general CNC shop. Headline $1.05 million. Eligible AR and inventory follow the peg at $310,000 (Classes III/IV). Buyer wants $620,000 on Class V citing an FMV-in-use list. Seller wants $280,000 on V and the residual in VII. Both CPAs write letters. They meet in a middle that is still not advice from this site. Both file the same 8594.
A second file: ebitda-3-10m certified supplier, synthesized 6.5x–9.0x aerospace band, heavy five-axis cells, customer relationships that the buyer calls goodwill and the seller calls the company. The fight is larger. The method is the same: classes, documents, one form, two signatures that match.
BizBuySell's 223-day 2025 manufacturing median close (Source: BizBuySell) is a planning number. Put the CPA on the calendar the week the LOI is signed, not the week the wire is scheduled.
Educational information only. Not tax advice. A CPA prepares Form 8594. Counsel drafts the allocation exhibit. Jason Taken is a business broker with HedgeStone Business Advisors. No allocation guarantees a close or an audit result.
How do working capital, covenants, and non-competes show up on the form?
Class III AR should match eligible AR in the peg, not face AR that includes related-party fluff. Class IV inventory should match the signed physical after E&O and customer-owned kicks. If those two classes wander, the residual that lands in VII is fiction.
A seller non-compete is often discussed as a Class VI intangible. Whether a slice of price should sit there is a CPA and counsel question on your facts. Do not handshake a large covenant allocation to "help the buyer" and then act surprised at your own tax return. Non-competes and key-employee agreements are the people documents. The form is the tax photograph.
Software seats, drawings, and process IP can sit in Class V or VI depending on facts. Name them on a schedule so nobody dumps "the rest" into goodwill and calls it done.
What process mistakes create two different 8594s?
Each side using a different appraisal standard. The buyer citing OLV to shrink Class V while the seller cites FMV in continued use to grow it — without saying so. Changing inventory methods between QoE and close so Class IV moves. Leaving real estate inside the operating price and then arguing about cells. Filing different forms and hoping the IRS does not notice.
Quality of earnings can restate inventory and AR in ways that should flow into Classes III and IV. If QoE and 8594 ignore each other, you will explain the difference to someone you would rather not meet.
Census CBP 2023's 284,452 establishments and 68.4% under 20 employees (Source: Census CBP) means most sellers will have one CPA who has not filed many 8594s on cell-heavy shops. Hire one who has, or pair yours with the buyer's for a single exhibit. The fee is cheaper than two inconsistent forms.
SBA 504 can finance owner-occupied buildings up to $5 million generally and $5.5 million on stated small-manufacturer projects (Source: SBA). That building allocation is a real-estate stack. It still has to live in the right class if the dirt is inside the asset deal. Occupancy rules (51% existing / 60% new construction) do not set Class V for the mills.
Illustrative only: seller's CPA drops $90,000 of fixtures into VII as "part of the going concern." Buyer's CPA puts the same fixtures in V. Both file. That is the audit seed. Meet before anyone files.
Fed utilization 76.0% (Source: Fed G.17) and ISM Prices 71.1 (Source: ISM) describe the climate. They do not allocate a press brake. HedgeStone will not let a CIM treat the multiple as the allocation. Jason Taken remains a business broker. The CPA owns the form. Combined 7(a)+504 can reach $10 million for fitting borrowers (Source: SBA); that capacity still does not choose Class V for you.
State sales tax on a bulk machinery transfer is a closing-state statute, not a federal class. Manufacturing-equipment purchase exemptions and occasional-sale rules are different questions. Successor sales-tax liability still exists in several states even where UCC Article 6 is gone. Put the state CPA on that sentence the same week you draft 8594. Do not assume "we repealed bulk sales" answers the iron.
A last process habit: lock a draft allocation exhibit at the same time you lock the peg. If Class IV inventory and the peg inventory component disagree by more than a rounding item, stop and reconcile before anyone wires. How it works puts paper in an order for a reason. Allocation is not a December surprise.