When it comes to the small business owner, you need the right planning and documentation to be able to put a separate tax-advantage cost tag on your goodwill.
The Tax Theory
In the recent tax court decision that upheld the idea of tax-advantage, many tax practitioners have been left wondering if the theory of the tax-advantage can practically work. However, there is some good news for business owners; they may be able to lower their corporate level tax when they have an acquisition or merger. This can be done by separately transferring and identifying the original owner goodwill in the current business.
The Business Valuation Goodwill is known to be an intangible asset in any business. We have tax rules that define the intangibles in some ways. The first one the intangibles are known to focus on is the value of the business, and it can be attributed to being an expectation that most customers continue to patronize. Mostly it occurs because of the company name or the reputation of the business. Goodwill represents the personal influence or touch that every business owner brings to their business
The valuation professional in the recent past has been known to be quite adept when it comes to putting the dollar value on business goodwill. The tax court and the IRS have latterly recognized that personal goodwill is an asset to the company owner and not to the enterprise itself, and it can be possessed and transferred to the buyer. If the goodwill is held and then sold as an asset of the said business, it should be in the context of C Corporation. Goodwill is subject to two levels of business taxation when it comes to the selling of a company, and they include:
- Corporate level tax: the corporate level is applied when a business asset is sold and with a high margin of about 35%.
- The purchase price: when the purchase price of an asset is distributed to the former business owner it is subjected to net investment income tax and the capital gain tax totaling to about 23.8%
Reducing Goodwill Tax
If a business owner can identify goodwill as an asset of the owner but not of the company, he may be able to transfer the acquiring entity separately. This will help the taxation of the sale to be computed as capital gain and the net investment income tax, thus reducing the tax by more than half the amount the owner would have paid. To be able to avoid paying taxes on goodwill, you should prove that the goodwill shown in the business depends on your personal character.
Secondly, you should be able to prove that you have the right to sell the goodwill and that you have never transferred the goodwill to your primary business. This will help you to be able to prove absences of non-complete agreements and contracts. It also helps you to walk away from the company without having any strings attached to the enterprise.
Your personal goodwill should be appraised by a third-party so that they can be able to establish a purchase price that will be accepted by the buyer. You may also have a separate valuation and identify personal goodwill that will be explicit and one that the court can recognize as stand-alone personal assets that are transferred and held by the owner.
As the economy worldwide stabilizes, many businesses are looking for acquisition and their personal goodwill should be treated as an asset and should be separate from business.