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Should the goodwill of a business be a taxable interest?

When you think about the sale of a business, you typically think about the assets of the business being sold to another party in exchange for a sum of money. Of course, the sale would be a taxable event for the seller, as he or she could realize a windfall in the transaction.

In the process of selling the assets of a company, some sellers also include the goodwill of the company in the price tag, so that the new owners can take full advantage of the relationships that have been built through the years with the company. However, this type of goodwill has not been included in the taxable interest the company’s assets garner; even though the IRS believes that it should.

The basic distinction behind this reality (besides the numerous Tax Court decisions upholding it), is that the goodwill of a company cannot be considered an asset of the company. Instead, it known as a personal asset of the owner(s).

Specifically, goodwill is based on relationships, or the work put in by the previous proprietors, that have been developed over the years. While this may affect the company’s success, goodwill is not a tangible item that is produced or sold. As such, the sale of goodwill cannot be viewed as a taxable event for the seller.

If you have further questions about taxable events and the sale of a business, an experienced tax attorney can help answer questions that could give a prospective owner some insight on how a business owner may negotiate a deal.

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