Article Posted on 11/21/2019
Recently we had a question on goodwill. The client wanted to know what goodwill actually is and how it is taxed. Here’s a primer to help you avoid confusion about goodwill:
As the seller, you have self-created goodwill when the total sales price of your business exceeds the fair market value of its assets, both tangible and intangible.
You have acquired goodwill when you purchase the assets of another company for more than the value of its tangible and intangible assets.
Self-created goodwill is a capital asset because the law doesn’t specifically exclude it from being a capital asset. Thus, your sale of self-created goodwill produces tax-favored capital gain.
Acquired goodwill is an amortizable Section 197 intangible. You recover its cost in equal monthly amounts over 15 years. When you sell the acquired goodwill, it’s a Section 1231 asset if you held it for more than one year, which means you qualify for the best of all tax worlds:
If you have a net gain, it is a long-term capital gain.
If you have a net loss, it is an ordinary loss.