Tax Implications of Goodwill — American Tax and Business Planning (2024)

FAQs

What are the tax implications of selling goodwill? ›

The taxation of goodwill is not subject to a second level of tax and is already characterized as a capital asset taxed at the more favorable capital gains tax rate. However, some of the best tax minimization strategies involve the transfer of part of the asset to be sold to a charitable entity prior to the sale.

Goodwill must be reported on the tax return as a long-term capital gain. The seller must file Form 8949 and Schedule D to report the sale. The buyer must also allocate the purchase price to the various assets acquired and report the transaction on Form 8594.

Goodwill Tax Accounting

Asset Sale/338: Any goodwill created in an acquisition structured as an asset sale/338 is tax-deductible and amortizable over 15 years, along with other intangible assets that fall under IRC section 197.

Self-created goodwill is a capital asset because the law doesn't specifically exclude it from being a capital asset. Thus, your sale of self-created goodwill produces tax-favored capital gain. Acquired goodwill is an amortizable Section 197 intangible. You recover its cost in equal monthly amounts over 15 years.

then any gain arising from the sale of property used in the trade or business will not be included in net investment income. This includes any gain arising from the sale of goodwill or other intangibles.

If an intangible asset was held for less than a year, then it is subject to the short-term rate. If an intangible asset was held for a year or longer, then it is subject to the long-term rate. Capital gains tax rates have a cap of 20%, but most businesses end up paying less.

Both the seller and purchaser of a group of assets that makes up a trade or business must use Form 8594 to report such a sale if goodwill or going concern value attaches, or could attach, to such assets and if the purchaser's basis in the assets is determined only by the amount paid for the assets.

Because goodwill is not physical, such as a building or piece of equipment, it is considered to be an intangible asset and is noted as such on the balance sheet. Generally, the value of goodwill refers to or coincides with the amount over book value that one company pays when acquiring another.

Section 197(d)(1) provides that the term “section 197 intangible” means (A) goodwill; (B) going concern value; (C) any of the following intangible items: (i) workforce in place including its composition and terms and conditions (contractual or otherwise) of its employment, (ii) business books and records, operating ...

A deferred tax asset would be recorded for any excess tax-deductible goodwill (as adjusted) over book goodwill. If settlement would result in a tax-deductible asset (other than goodwill), then the recorded amount of the liability is added to the tax basis of such asset.

Does goodwill create a deferred tax asset? ›

Goodwill component 1

For tax purposes, component 1 goodwill is the deductible goodwill. For both, no deferred taxes are recognized at the acquisition date. Any subsequent difference is a temporary difference that creates a deferred tax asset or liability.

For tax purposes, negative goodwill is generally treated as a taxable gain. The acquiring company must recognize the excess of fair value over the purchase price as taxable income in the period of acquisition. This gain is subject to ordinary income tax rates and should be reported in the company's income statement.

Goodwill is a Section 197 intangible for tax purposes and is a business asset. Likely, other intangible assets might be capital assets as well. However any asset that was depreciated or amortized would have recapture of gain and reportable on Form 4797.

Therefore, gain from the sale of personal goodwill is not passive activity income and, consequently, it should be excluded from net investment income under Sec. 1411(c)(1)(A)(iii), so it is not subject to the net investment income tax.

Thus, goodwill, which is an intangible asset, would be distributed as part of a liquidation under section 333 if the corporation involved has any goodwill to distribute.

Yes, goodwill can be reported on Form 8949 and Schedule D. It depends. If these were not assets that would require depreciation then you can report capital assets held long term on Form 8949 and Schedule D.

Goodwill is typically considered a business asset but recent Tax Court decisions have suggested that goodwill can be a personal asset, thereby allowing the sale of goodwill to be considered a capital gain and taxed at a much lower rate and only once.

The sale of goodwill is often treated as a capital gain, specifically a Section 1231 gain, if certain conditions are met. Capital gains rates are generally more advantageous than ordinary income rates, offering potential tax benefits.

Use Form 4797 to report sales of rental property, depreciable personal property, land and buildings used in a trade or business, goodwill, etc. Report capital gains from these transactions on Form 4797 Part I or Part III. Report ordinary gains and losses on Form 4797 Part II.