Purchase-price allocation in cannabis deals

What is purchase-price allocation and when is it required?

When a buyer acquires the assets of a business, the tax code does not treat the price as one number. Section 1060 requires the price to be split among the assets whenever the assets make up a trade or business and the buyer’s basis is determined by what it paid. The split decides two things: the character of the seller’s gain, asset by asset, and the buyer’s tax basis in each asset.

Section 1060 also says that if buyer and seller agree the allocation in writing, the agreement binds both of them unless the IRS finds it inappropriate. In practice the allocation is a schedule to the asset purchase agreement, and each side promises to file consistently with it. Whether the deal is an asset purchase at all is covered in asset sale vs membership-interest sale.

The seven classes on Form 8594

Both parties attach Form 8594 to their returns for the year of sale. The price is allocated by the residual method: fill each class up to fair market value, in order, and whatever is left falls into goodwill.

Class	What it covers	Typical cannabis items
I	Cash and deposit accounts	Cash on hand, if transferred
II	Actively traded property, certificates of deposit	Rare
III	Receivables and debt instruments	Wholesale accounts receivable
IV	Inventory	Flower, biomass, finished goods, packaging stock
V	Assets not in another class	Lights, HVAC, extraction equipment, vehicles, leasehold improvements, real estate
VI	Section 197 intangibles other than goodwill	State and local licenses, non-compete, customer lists, brands, trained workforce
VII	Goodwill and going-concern value	The residual

The form’s instructions note penalties for failing to file correctly, and require a supplemental form in any later year when the price changes.

Why buyer and seller usually want different allocations

Asset	Seller’s result	Buyer’s result
Inventory	Ordinary income	Basis recovered through cost of goods sold as it sells
Equipment	Ordinary income to the extent of prior depreciation, then capital gain	Depreciable basis
Real estate	Capital gain, with a higher rate on prior depreciation	Long-lived depreciable basis; land not depreciable
License and other Class VI intangibles	Generally capital gain if held more than a year	Amortised over 15 years
Non-compete	Ordinary income	Amortised over 15 years
Goodwill	Capital gain	Amortised over 15 years

Section 197 sets the 15-year period, starting with the month of acquisition, and expressly includes goodwill, going-concern value, customer-based intangibles, any license or permit granted by a governmental unit, and a non-compete entered into with the acquisition. A seller taxed as a C corporation faces a second layer of tax when proceeds are distributed; seller-side tax is covered in taxes when selling a cannabis business.

How 280E changes the buyer’s side of the table

In most industries a buyer wants price in short-lived equipment and accepts 15-year amortisation on the rest. In cannabis the first question is whether the buyer’s cost recovery is a deduction that section 280E wipes out.

• Amortisation and most depreciation are deductions. For a buyer whose activity is still under 280E, which as of September 2026 means adult-use, amortisation of a license, a non-compete or goodwill produces no current federal benefit. The basis is not lost; it still reduces gain on a later resale.
• Inventory flows through cost of goods sold. Price allocated to inventory is recovered as the product sells, 280E or not.
• Producers can capitalise production depreciation into inventory. Under the producer inventory rules, depreciation on cultivation and manufacturing assets is an indirect production cost that becomes part of inventory cost. A cultivation or manufacturing buyer therefore gets real value from Class V allocations. A retail buyer’s store fixtures do not get that treatment. See 280E by license type.
• Medical buyers are now in the ordinary position. Treasury has said 280E will apply only to activity still involving Schedule I or II substances. A buyer of a medical-only business can deduct amortisation going forward, and a dual-license buyer will apportion.

None of this licenses an artificial allocation. Each class is capped at fair market value, and an allocation that loads equipment far above appraised value invites challenge. Where the numbers are large, an independent valuation of equipment, real estate and the license supports the schedule; see appraisal vs broker opinion of value.

Valuing the license inside the allocation

The license is often the most valuable thing being bought and the hardest to price separately. Three approaches appear in practice:

1. Market evidence. Reported prices for bare or pre-revenue licenses in the same state and license class. Most useful in capped markets; see license value in capped vs uncapped states.
2. With-and-without method. The value of the business with the license in place, less the value if the buyer had to apply and wait. This captures time and approval risk.
3. Residual. Whatever is left after tangible assets and identifiable intangibles. Simple, but it blurs the license into goodwill.

Because the license, goodwill and a non-compete are all 15-year section 197 assets for the buyer, the split among them matters mainly to the seller, since a non-compete is ordinary income, and for state tax and financial-reporting purposes.

Worked example

Illustrative only. A cultivation and manufacturing business sells its assets for $4,000,000.

Class	Asset	Allocation	Seller	Buyer
IV	Inventory	$400,000	Ordinary income over cost	Recovered through cost of goods sold
V	Cultivation and extraction equipment	$900,000	Ordinary to the extent of prior depreciation	Depreciation capitalised into inventory cost
V	Leasehold improvements	$300,000	Mixed	Depreciable; production share capitalised into inventory
VI	State and local licenses	$1,200,000	Capital gain	15-year amortisation: $80,000 a year
VI	Non-compete	$100,000	Ordinary income	15-year amortisation: about $6,667 a year
VII	Goodwill	$1,100,000	Capital gain	15-year amortisation: about $73,333 a year
	Total	$4,000,000

The buyer’s section 197 amortisation totals $160,000 a year. At a 21% federal rate that is worth $33,600 a year if deductible, and nothing currently if the buyer’s activity is adult-use and 280E applies. Over 15 years the difference is $504,000 before discounting. That gap is one reason the rescheduling tax scenarios matter to price.

Earn-outs, holdbacks and seller notes

Fixed deferred payments count as consideration at closing. Contingent payments, such as an earn-out, are added when they are paid or become fixed, usually increasing Class VI and VII, and both parties file a supplemental Form 8594. A tax holdback that is released to the seller is price; one that is returned to the buyer reduces it.

Practical sequence

1. Agree in the letter of intent that the parties will negotiate an allocation and file consistently.
2. Get equipment and real estate valued early; they anchor Class V.
3. Count and value inventory at closing under an agreed method; see inventory and biomass at closing.
4. Attach the allocation schedule to the purchase agreement, with a mechanism for adjusting it when the price changes.
5. Each party’s CPA files Form 8594 with that year’s return.

This page is general education, not tax advice. Allocation has state tax consequences as well, including sales tax on tangible assets in some states.