Sale of Business-Seeking Tax Experts' Opinion

No. Apply the FMV of the equipment to the equipment. THat portion of the gain will be taxed as ordinary income under IRC Section 1245.

Your basis in good will is zero. Any costs you incurred creating that goodwill has already been expensed.

Presuming you sold no other identifiable assets such as customer lists, trademarks, leaseholds, etc., then yes.

(1) First, if you allocate all $100k to the equipment you will get audited for sure. Under the rules, see, e.g., IRS Pub 544, you (and the buyer) are required to allocate the purchase price according to the "residual method" under which the purchase price is first allocated to tangible assets, then to a variety of other classes of assets, and anything left over at the end is allocated to goodwill. (2) Your goodwill is self-generated and will almost certainly have a basis of $0. (3) You will almost certainly have $95k in long term capital gain from the sale of the goodwill.

Or just do a stock sale if the buyer is willing to do that

Both buyer and seller are required to report the allocation of the purchase price to specific classes of assets. There is a form for this but I can't recall the form number at the moment. A difference between the buyer's and the seller's allocations is definitely an invitation for audits of both. Since the buyer and seller presumable have conflicting interests, an allocation that is the same for both will likely be accepted as "arms-length." The buyer wants the price allocated to depreciable items. However, this can raise issues of depreciation recapture, etc. for the seller. You need to work with your buyer to come to a mutually acceptable arrangement. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

On a related note, I have a taxed-as-partnership client that sold assets (including goodwill) in 2006. The only written documents concerning the purchase show that the buyer acquired fixed assets at NBV. I believe that the fixed assets have significantly more FMV, since the sellers took maximum Sec 179 each year and NBV is next to nothing. Upon being asked to suggest an asset allocation, the buyers' in-house accounting staff (whom I believe to be relatively sophisticated) replied "We allocated $XXX to fixed assets," where $XXX = NBV. My guys want to get the tax return done and over with, but they also don't want to amend in the future or tick off the buyers (for whom the sellers now work). My worry is that when the buyers' CPA gets a hold of the books, a new asset allocation will be suggested (and my guys will have amended returns with a significant increase in tax). Anyone have any thoughts on the best way to handle this?

Phoebe :)

The form to report the allocation is Asset Allocation Statement Form 8594. I just did one last year for my corporate client who sold his business. The Realtor who represented both buyer and seller didn't know about the form and tried to get me to fill it out. After all it's a tax form isn't it? After many discussions back and forth I manage to convince him it was his job to allocate the remaining purchase price between the covenant not to compete and goodwill. In the end he asked me if I would accept splitting it down the middle. I told him if both parties would accept that allocation I would as well. That's how we did it. I am amazed that a licensed real estate broker would not know how to draft a sale of business contract. They teach this stuff in real estate class, at least in mine we learned it. There are seven classes of assets to be assigned a portion of the purchase price starting with cash in the register to goodwill. Both parties to the sale must agree on the allocation, and the other party's name, address, and tax ID number appear on each copy of the form so the IRS can match them. This is why I am offering to teach a class on the tax aspects of real estate at our local Association of Realtors. Even though realtors don't give tax advice, they need to know what they are doing to their clients' tax situation by various terms of their contracts. . Linda Dorfmont E.A., CFP, CSA

If a written agreement exists, the rules under Section 1060 require you to use the allocation in the agreement. Only IRS can change the allocation without amending the agreement.

-- Drew Edmundson, CPA Cary, NC

Mr. Brown mentioned that 95K goodwill will be taxed at capital gain rate unless there are other assets such as customer list. I do have a customer base that I will have to sell to the buyer. How do I seperate that from goodwill ? Will the sale of customer list be considered ordinary gain? Also, is consideration for not to compete be taxed as ordinary income? How buyer going to record not to compete consideration for tax purpose ?

The buyer would probably like that, because a customer list can be depreciated while goodwill cannot.

No, I think that would be a capital gain as well.

A buyer depreciates the cost of a covenant not to compete over time - I think it's five years. I believe the income from a covenant not to compete should be ordinary income to the seller. Stu

See Section 197, effective August 10, 1993, goodwill is amortizable over 15 years.

-- Drew Edmundson, CPA Cary, NC

Stu, I believe under IRC Sec. 197 the purchased goodwill, the customer list, and the covenant are all subject to the

And some might argue subject to SE Tax. I've no position since I have not had to sign anything recently with the issue. But I can see the point. I'd tend to lean towards no SE though. Regards,

Mark Rigotti

Thanks!

Stu