BEATING DOUBLE TAXATION USING PERSONAL GOODWILL

What should matter most to a seller of a business are the after-tax proceeds. One of the roadblocks that arise in structuring a business sale has to do with the competing tax consequences of the buyer and seller. If structured properly, the seller of personal goodwill receives significant benefits with no adverse tax consequences to the buyer.

From the sale/purchase of personal goodwill:

  • The selling shareholder avoids corporate-level tax and ordinary individual income tax rates; and reports long-term capital gain which often can be very significant.
  • The buyer records an amortizable asset that would not be available if the consideration was paid for the stock of the corporation.

For personal goodwill to exist:

  • Must meet the definition of goodwill from a tax perspective.
  • Must be owned by an individual.
  • The individual must not have a non-compete or employment agreement with the corporation.
  • Have an appraisal of the personal goodwill.

With the correct set of facts and the proper planning, personal goodwill is a viable tax planning idea for owner-managed businesses.

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