As a business broker, I understand how important it is for you to know how goodwill is taxed when selling a business. In this article, I will explain how goodwill is taxed and provide you with some helpful tips so that you can make the most of your assets when selling your business.

How Is Goodwill Taxed When Selling a Business?

Goodwill is taxed to the seller at capital gains tax rates. The tax rate on capital gains has changed several times over the last 20 years. It is important to understand the capital gain rate applicable to you at the time of sale.

Generally, all amounts received by the shareholders from the sale of their personal goodwill should be taxed at capital gains rates irrespective of the length of ownership of the business. However, there is an exception to this rule. If you have only made $41,675 in goodwill, you do not have to pay any capital gains taxes on that income. This is essentially a free $41,000.

In most cases, when a seller has goodwill, it is taxed at long-term capital gains rates. But if the seller owned the business for less than a year, the goodwill will be taxed at short-term capital gains rates. It is important to understand the difference between long-term and short-term capital gains rates.

Courts have held that goodwill may be considered a personal asset (and not an asset of the business being sold) if the earning power of the business is not attributable to the goodwill. If a business’s goodwill is personal goodwill, it will only be taxed at an individual shareholder level. Whether or not it is considered a personal asset relates to the source of the business’s earnings.

Tips for Taxing Goodwill When Selling a Business

  • Know the current capital gains rate applicable to you at the time of sale.
  • Understand the difference between long-term and short-term capital gains rates.
  • Be aware that goodwill may be considered a personal asset if the earning power of the business is not attributable to the goodwill.
  • Be aware that if a business’s goodwill is personal goodwill, it will only be taxed at an individual shareholder level.

When selling a business, it is important to understand how goodwill is taxed. Knowing the current capital gains rate, the difference between long-term and short-term capital gains rates, and the rules around personal goodwill can help you make the most of your assets when selling your business. If you have any questions about how goodwill is taxed when selling a business, Atlantabusinesses.com is a great resource for answers to all your questions about selling a business and about business brokers.

Is the profit from the sale of a business’s goodwill subject to taxation?

It is essential to consult a CPA about the current capital gains tax rates when you are selling your business, as these have altered over the last two decades. Nevertheless, taxes must be taken into account amongst other considerations.

What factors do you consider when calculating the value of goodwill when selling a business?

To calculate the value of goodwill in a business sale, subtract the total value of the tangible assets (minus liabilities) from the estimated market value of the business.

Does goodwill qualify as a long-term capital gain for tax purposes?

In most instances, when a person owns and sells a business with goodwill, the amount is taxed at the long-term capital gains rate. However, should the individual have owned the business for less than 12 months, the goodwill would be taxed at the ordinary income tax rate.

When goodwill is sold, is it considered a capital asset?

Goodwill is an asset that does not have a physical form, but is still considered a capital asset. It is the amount over book value that one company pays when purchasing another company. It is classified as a capital asset since it has the potential to provide a long-term revenue stream to the purchaser.