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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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We sold our business a few months ago. As part of the sale

Customer Question

We sold our business a few months ago. As part of the sale and process, we had to enter non-compete agreements with our franchisor that has 35 location in Atlanta for a period of three years. We had to do a 5 year non-compete as part of a lease agreement and an APA for the sale of the business. Is the non-compete something we can use to claim losses based on the performance of the business? can it be amortized over 5 years or 15 years? (term of the lease?)
Submitted: 9 months ago.
Category: Tax
Customer: replied 9 months ago.
It was a preschool business
Expert:  Lev replied 9 months ago.

You are correct that non-compete agreement is classified as amortizable section 197 asset and as such it is amortized over 15 year period.
However - in your situation - there mist be cost basis to claim amortization.
If you paid certain amount to obtain the non-compete agreement - that woudl be cost basis.
But if you do not have any basis - there is nothing to amortize.

We may not use expected losses which were not included into your income as the cost basis.
But if for some reason that amount WAS included into your taxable income as a part of sale contract - the situation might be different.

Please verify.

Customer: replied 9 months ago.
I'm not sure, but part of the buyer's requests and demands were that we show past income tax returns and
quarterly reports to come up with the goodwill amount. That franchisor we had makes it impossible for us to open
a similar business for three years and the lease agreement restricts if for the term of the lease. Its 15 years with two 5 year renewable clauses. Can the agreement be amended to gain tax benefit?
Customer: replied 9 months ago.
we paid 20% or are still paying 20% on the goodwill amount. It was a small business, but my sole source of income. The lease only covers mortgage and expenses. We won't own our building for another five years.
Expert:  Lev replied 9 months ago.

How you handle proceeds from your business is a separate issue - we may address that - but I do not want to mix several issues to avoid confusion.

Regarding the non-compete agreement....

For instance if you PURCHASE the business and business assets include the non-compete agreement - so you allocate a part of the purchase price to that agreement - for instance $10,000 - that woudl be your basis which you PAY - and you woudl amortize that cost over 15 years.

However - if you the one who SIGNED the agreement - and do not pay anything - you do not have any basis and there is nothing to amortize.