Discussion:Goodwill Amortization Seller Financed Contract

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Discussion Forum Index --> Tax Questions --> Goodwill Amortization Seller Financed Contract

Dave99 (talk|edits) said:

22 January 2007
I have a client who purchased a business on a seller-financed contract. My client is personally liable for the debt. Does my client amortize the goodwill as it is paid or amortize the full amount beginning when the contract is signed?

JR1 (talk|edits) said:

January 22, 2007
On signing, over 15 years.

JEllegate (talk|edits) said:

23 January 2007
Agree with JR1 - take a look at IRC ยง197.

Deback (talk|edits) said:

April 2, 2007
I have a Sch C client who purchased his Dad's 1/2 share of the partnership on 1/1/04. He is paying his Dad for his Dad's ending equity at the end of 2003. There was no itemization of what my client bought, so I recorded a portion of the purchase price for the father's ending capital balance and the balance of the purchase price as goodwill.

When I went to college for accounting and taxes, goodwill could not be amortized, and I haven't had to deal with goodwill until 1/1/04, so I was ignorant to the fact that goodwill can now be amortized (beginning in 1993, if I've read Sec. 197 correctly).

My question is: Will there be any problem with amending the 2004 and 2005 returns to deduct the goodwill amortization? Or is it too late to amend those years?

AHH (talk|edits) said:

2 April 2007
Deb I can't believe you are actually asking a question....you're the one with the answers Image:bigsmile.jpgImage:bigsmile.jpg

Why couldn't you amend 04 & 05? It's not too late for that. What did you do w/ the portion you allocated to goodwill?

Deback (talk|edits) said:

April 2, 2007
I've had to ask a few questions lately and don't like to do that. I think it's from spending a lot of time here and discovering that I've been doing certain things wrong, etc.

Well, when researching this, I thought I read something about you only have six months to make the election to amortize goodwill, but I was in the middle of other things and couldn't concentrate very well, with clients coming in and out constantly all day.  :)

The portion I allocated to goodwill is just an entry on the balance sheet for goodwill at $81,674.

Glmpllc (talk|edits) said:

2 April 2007
Deback...you can amend 2004 and 2005...

You state that he purchased his Dad's 1/2 share of the partnership...does that mean they filed a 1065 prior thereto or that his dad was a partner in a partnership?

If the first, then in 2004, there was a liquidation of the p'ship with son and dad each receiving an undivided interest in the assets...then son purchased Dad's interest in the assets. Purchase price should be allocated on 8594 among the various asset classes up to the assets FMV...anything left over is good will. I believe son now has new assets to depreciate, meaning new lives, elections, etc.

Curious how paying for "ending equity" would generate goodwill, unless assets were worth less than carrying value.

AHH (talk|edits) said:

2 April 2007
You don't like asking questions? What is this forum for then? Why shouldn't you ask questions? Do you think you are supposed to always know the answer and never have any questions? Don't you see how easy it is to ask questions here?Image:bigsmile.jpgImage:wink.jpg

Deback (talk|edits) said:

April 2, 2007
Yes, they filed a 1065 before the son purchased his Dad's 1/2 share for $121,000. This included a building and equipment that were fully depreciated, in addition to inventory of auto body repair shop parts and materials.

I know that I screwed it all up at the beginning of 2004, but since all of the assets had been fully depreciated, including the building and the equipment, I filled out Form 8308 (not 8594).

I only made journal entries to zero out the partners' capital accounts, with an offsetting CR entry of $39,326 to the loan payable to his Dad for his Dad's ending capital balance and recorded the balance of $81,674 to Goodwill DR and a loan payable CR to his Dad for the same amount. I left the rest of the balance sheet items the same as they were at 12/31/03.

Can I just fix this mess by amortizing the Goodwill of $81,674 for 15 years beginning with 2004?

Deback (talk|edits) said:

April 2, 2007
AHH - Because I've been doing taxes for 32 years, and I feel like I should have known how to report the sale, etc. So this is embarrassing. But I don't deal with these kind of things very often.

Bottom Line (talk|edits) said:

3 April 2007
Come on Deb - only proves you're human after all!

Glmpllc (talk|edits) said:

3 April 2007
Deback...see Rev. Rul. 99-6...I think you need to readdress the purchase price allocation...

my two cents...

Deback (talk|edits) said:

April 3, 2007
Thanks, Glmp. I appreciate your help and the time you spent looking up the 99-6 link.

I think I've been reporting the selling partner's gain correctly on Form 6252 and Sch B for the amount he received in excess of his basis in the partnership.

I remember when I asked them back in Jan 2004 what the buying partner was buying, they didn't have any breakdown of the FMV of the assets, and because I didn't know any better (after researching it for quite awhile on the web and in books), I just carried over the balance sheet items (fully depreciated assets) to the buying partner and added Goodwill for the difference (instead of starting depreciation on the assets at the FMV).

The other day, I asked the buying partner if he had a breakdown of what he paid his dad for. He said no. At this time, he's not aware that I screwed this up. In my mind, if I just start amortizing goodwill beginning at 1/1/04 for 15 years, this would come out about the same if I depreciated a building for 39 years and equipment for 7 years. Nope! It wouldn't come out the same, not if the building has to be depreciated over 39 years. Hmmm...guess I'd better talk to him again and get his opinion of what everything was worth three years ago, but I already know he will tell me he has no idea.

Guess I'll worry about this tomorrow.

Thanks again for your help.

Deback (talk|edits) said:

April 3, 2007
Glmpllc - I finally got back to this return, just called my client (who is very easy to get along with), and we both agreed to split the $81,674 that I had recorded as Goodwill, as follows: $67,000 building, $3,000 addition to land value, and $11,674 equipment. The original cost of the building was $33,500 in 1981, land of $3,000, and the total cost of the equipment from 1981 through 2003 was $32,146. Just wanted to let you know how I'm resolving this. I'm going to do the 2004 and 2005 amended returns now and then finish up his 2006 returns. Thanks.

Ing (talk|edits) said:

19 October 2007
May i ask why in IFRS 3,the goodwill will not be amortize but in IAS 38, they want the goodwill to be amortized within a period of time?

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