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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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In the sale of an LLC, amounts attributable as goodwill

Customer Question

In the sale of an LLC, amounts attributable as goodwill would be taxed as a capital gain, and amounts received as non-compete clause would be ordinary income. Is that correct? Also, the sale of fully depreciated assets would be considered ordinary income as well. Yes?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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Yes, generally, that's correct

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Non-compete agreements are generally taxed as ordinary income to the seller, which from the seller's perspective is less than desirable. But, for a buyer, it is expensed as incurred, which is desirable for the buyer but not the seller.

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SO, in some cases, the seller can get capital-gain taxation rate by incorporating the non-compete payments into the general goodwill of the business or a portion of the payment as personal goodwill.

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(IRS doesn't care because, as long as the buyer and seller's 8594 agrees, someone will pay the larger share)

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In these instances, the buyer would be prohibited from expensing these payments as incurred, as would be preferred, but instead amortizing them as goodwill payments.

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So, how the non-compete is structured (allocated in the sales agreement) becomes a negotiating point between buyer and seller.

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Again, the buyer and seller must decide what portion of the purchase price is to be allocated to the covenant not to compete on I Form 8594, Asset Acquisition Statement (IRC § 1060)

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And, yes, on the depreciated assets business personal property gains (sale price at more than book) is ordinary income ... for business real property it's a special 25% rate.

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