The question of whether or not goodwill is taxable is an important one for business owners and brokers alike. When it comes to buying or selling a business, understanding how goodwill is taxed can help you make the right decisions to ensure your transaction goes as smoothly as possible. In this article, we’ll explore the tax implications of goodwill, including when it’s considered a personal asset and subject to capital gains taxes.

Is Goodwill Taxable?

The short answer to this question is yes, goodwill is taxable. In the sale of a business, goodwill is defined as the amount paid above and beyond the fair market value of the business’ assets and liabilities. When transferred on their own as personal goodwill, your excess net earnings are subject to capital gains taxes. If a business’s goodwill is personal goodwill, it will only be taxed at an individual shareholder level. Whether or not it’s considered a personal asset relates to the individual’s ownership of the business.

When is Goodwill Taxed at Long-term Capital Gains Rates?

In most cases, when a seller has goodwill, it’s taxed at long-term capital gains rates. But if the seller owned the business for less than a year, the goodwill is considered a short-term capital gain and is taxed at ordinary income rates. Thus, all amounts received by the shareholders from the sale of their personal goodwill should be taxed at capital gain rates irrespective of the length of ownership.

Conclusion

When it comes to selling a business, understanding the tax implications of goodwill is essential. In most cases, goodwill is considered a personal asset and will be subject to capital gains taxes. However, the length of ownership can affect whether or not the gain is taxed as a long-term or short-term capital gain.

If you’re considering buying or selling a business, the best way to make sure you understand all the tax implications is to work with an experienced business broker. At AtlantaBusinesses.com, you’ll find experienced business brokers who can help guide you through the process and answer any questions you may have.

What is the tax treatment of goodwill?

When discussing goodwill, it is advantageous to the seller to have a higher percentage since capital gains are taxed at a lower rate than ordinary income. This means that the portion of the business value attributed to goodwill will be treated as capital gain for the seller.

What is the process for reporting the sale of goodwill on my tax return?

The sale of goodwill is a capital asset that should be reported on Schedule D and Form 8594 must also be completed by both the buyer and the seller. Without a properly filed Form 8594 by the due date of the return and without being able to demonstrate a reasonable excuse, you may be subject to penalties.

Can goodwill be taken into account for tax purposes?

If you have owned your business for more than one year, the profit you receive from its sale due to goodwill will be treated as a long-term capital gain. This is beneficial for the seller of the business, as long-term capital gains are taxed at rates lower than ordinary income, starting at 15% and increasing to a maximum of 20%.

Does goodwill qualify for long-term capital gain tax treatment?

In most instances when a seller has goodwill, it is subject to long-term capital gains taxes. However, if the business has been owned by the seller for less than one year, the goodwill may be taxed at the ordinary income rate.