- quote -

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

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Drew Edmundson <drewsbeagles[at]hotmail.com> wrote:
- quote -

Thanks!

Stu

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"Stuart A. Bronstein" <spamt...[at]lexregia.com> wrote:
- quote -

Stu, I believe under IRC Sec. 197 the purchased goodwill,
the customer list, and the covenant are all subject to the
15-year amortization rule, rather than being amortized over
the useful life.

The income from a covenant not to compete is ordinary income
to the seller.

Katie in San Diego

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"Stuart A. Bronstein" <spamtrap[at]lexregia.com> wrote:
- quote -

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

--
Drew Edmundson, CPA
Cary, NC

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"Rashid" <rashidwajed[at]yahoo.com> wrote:

- quote -

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

- quote -

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

- quote -

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

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- quote -

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 ?

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"Phoebe Roberts, EA" <phoebe[at]cottagesoft.com> wrote:

- quote -

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

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- quote -

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

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Shyster1040 wrote:

- quote -

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

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"Rashid" <rashidwa...[at]yahoo.com> wrote:

- quote -

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

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"Rashid" <rashidwajed[at]yahoo.com> wrote:

- quote -

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

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(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.

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"Rashid" <rashidwa...[at]yahoo.com> wrote:

- quote -

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.

- quote -

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

- quote -

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

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I have a service business that I am thinking about selling.
The business has some equipment the fair market value of
which is about $5K. I purchased these equipment about 5
years ago for $10K which I depreciated under section 179.
The sale price of the business is $100K. My questions are

(1) Should I allocate the entire purchase price (100K) to
the equipment ? Can or shoudl I do that? If I do that, is
the gain going to be taxed at ordinary rate or long term
capital gain rate?

(2) If I allocate fair market value (5K) to equipment and
the rest of the sale price ($95K) to goodwill, what will be
the cost basis of the goodwill. Can it be zero? I did not
pay for any goodwill. I created the value of my business
over the years.

(3) If I can allocate 95K to goodwill, and the basis of
goodwill is zero, I will have a long term capital gain of
$95K and pay tax at long tern capital gain rate. Am I
correct?

Your advice or comment will be highly appreciated.

Thanks

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