Tax treatment of selling goodwill

The use of Personal Goodwill as a Tax Savings Opportunity in a Transaction  February 5, 2013 – 09:00 am
Tax considerations

Let’s look at the benefits associated with allocating value to personal goodwill in an acquisition of a closely held C corporation.  This is a sale transaction involving closely held business.  If personal goodwill is treated as property that can be sold in conjunction with a company’s assets or stock, it can produce a favorable tax result for both the buyer and the seller.

Buyers typically prefer to structure transactions as asset acquisitions because it provides a tax basis step-up. A step-up results in higher tax deductions for tangible and intangible assets, resulting in lower taxes. In addition, buyers prefer asset acquisitions to avoid acquiring any contingent liabilities that may materialize. Sellers, preferring a stock sale, are often forced to structure a transaction as an asset sale, which significantly increases the cost of selling due to the double layer of taxation.

When a business is acquired in a transaction structured as an asset sale for income tax purposes, the buyer and seller are required to allocate the purchase price to the assets acquired or sold. The primary asset categories typically include working capital, fixed assets, and intangible assets, such as customer lists and relationships, supplier relationships, etc.

The value of intangible assets of the business (including goodwill) is related to the market advantage that gives rise to expected earnings in excess of a normal return on the other operating assets of the business. Business goodwill value is evident to the extent that these advantages relate to assets owned by the business (i.e., patents, trademarks, etc.). On the other hand, to the extent that these advantages relate to the seller’s individual name, personal relationships, or personal reputation, then personal goodwill is evident.

Source: Sunbelt Bay Area

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