The Business purchase price is allocated to the Inventory, Fixtures, Goodwill and Non Compete.
Price allocated to Inventory will offset the cost of the inventory and excess will be taxed as ordinary income.
Price allocated to fixtures/equipment will be reduced by the adjusted cost basis of these assets. Any gain on this asset to the extent of depreciation claimed will be taxed at ordinary tax rates
. Gain in excess of depreciation will be taxed as long term capital gain.
If the goodwill is self created asset than any amount allocated to goodwill will be taxed as long term capital gain.
Amount allocated to non compete is taxed as ordinary income.
Generally higher allocation to goodwill is preferable from sellers point of view.
Let me know if you have any question.
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code
of 1986, as amended.