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In the sale of an LLC, amounts attributable as goodwill

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would be taxed as a...
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
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12/16/2015
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,867
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi,

...

Yes, generally, that's correct

...

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.

...

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.

...

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

...

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.

...

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

...

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)

...

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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