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Discussion:Sale of business involving goodwill

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Discussion Forum Index --> Tax Questions --> Sale of business involving goodwill


Biasinik (talk|edits) said:

9 April 2006
I have a single-shareholder S corp who sold the business in '05 (asset sale). The sale was alloc approx $95K to goodwill, the remainder to assets. Do I just create a new asset as of the sales date for goodwill with a zero basis (I'm using Lacerte)? Thanks.

Dennis (talk|edits) said:

9 April 2006
No. unless there was a specific contract, the shareholder sells the good will as an individual. Martin Ice Cream

Biasinik (talk|edits) said:

9 April 2006
OK, I read it. Now let's see if I understand. This sale consisted of $20K cash, $130K note. I should only record that portion of the note related to the assets to the company. The shareholder takes the rest. Is this correct? Thanks for your help.

Natalie (talk|edits) said:

October 14, 2013
The "Martin Ice Cream" link goes no where. Does anyone have an updated link?

Ckenefick (talk|edits) said:

14 October 2013
Why this case is not posted in the freezer aisle of every grocery store is beyond me...

Harry Boscoe (talk|edits) said:

14 October 2013
Does this work: Martin Ice Cream?

This case is really long. I would suspect that someone could find - and link to - a discussion of the salient points from this case that could be read in about one tenth the time. Anybody?

Ckenefick (talk|edits) said:

14 October 2013
http://www.woodllp.com/Publications/Articles/pdf/The_Emperor_of_Ice_Cream_Dentists_and_Personal_Goodwill.pdf

Terry Oraha (talk|edits) said:

14 October 2013
Dont forget the recent cases too...James P. Kennedy and H & M Inc.

Personal Goodwill, Purchase Agreements, and Covenants Not to Compete TAX CLINIC by Adam Steinmetz, CPA, Washington, D.C. Published February 01, 2013

Editor: Greg A. Fairbanks, J.D., LL.M. [1]

Natalie (talk|edits) said:

October 15, 2013
Thank you. The links work.

Kbairtax (talk|edits) said:

12 March 2014
Okay, I am confused. I have read Martin and that does not pertain to my situation. I also read the TAX CLinic article and that confused me more.

I have a single shareholder S-corp that did an asset sale. $305,000 total, with $40,000 going to assets, $4,000 to inventory and $261000 to goodwill. All of the monies were received by the s-corporation and then distributed to the shareholder. The sale contract states the Goodwill is "All intangible assets used in the business including, without limitation: any and all trademarks; service marks; trade names; phone numbers; and memberships in 2 specific organizations". None of that stuff has a value in the s-corp....the single shareholder started the biz from scratch 35 years ago.

Now there is a clause in the agreement that the shareholder agrees that for a period of 60 days after closing, she was to provide consulting services to purchaser at no cost. Then it states she will provide these services as an independent contractor. Beyond 60 days, she was to be available via phone for 10 months.

So she did the 60 days, then was an independent sales rep for approx. another 60 days (as a 1099) and then the relationship broke off.

As I see it, we need to allocate some of the $261,000 as compensation, but how??? And the rest is cap gain treatment. THe only way I can see to do this in Proseries is to create an asset with a longer than one year purchase date and then sell it so it flows to the K-1 appropriately. But I have no clue how to get the compensation component in there.

Any help appreciated.

Ckenefick (talk|edits) said:

12 March 2014
So she did the 60 days, then was an independent sales rep for approx. another 60 days (as a 1099) and then the relationship broke off.

Why don't you just use the amount she was paid (for Days 61 - 120) as a good measure of the value of her services for Days 1 through 60?

Kevinh5 (talk|edits) said:

12 March 2014
Because days, unlike dollars, are not fungible.

Kbairtax (talk|edits) said:

12 March 2014
Well, the 61-120 was commission based. I could use that figure, it was small though....like $4000 I think. Still how do I put that on the S-corp return?? What line?? And the rest of the "goodwill"......just create the asset in the s-corp??

Ckenefick (talk|edits) said:

12 March 2014
I guess, then, we'd have to make an inquiry as to where the hidden value might be: I was simply thinking that the comp for "Days 61 through 21" might be viewed as reasonable, so we'd pull the same amount away from Goodwill. But if you're thinking that the the Comp actually paid for Days 61 for 120 really represents comp for Days 1 through Days 120, then we'd do nothing. And, in fact, that would be more beneficial to Kbair's client...and in fact, might be consistent with the other side's 8594.

So, unless some add'l facts are given, I vote for Kevin's idea.

And be sure she makes a SEP contribution.

Ckenefick (talk|edits) said:

12 March 2014
Yeah, but to K5's point: Were those commissions standard or inflated?

But either way, with such a low level, I'd pass on it and make no adjustment.

Who got the money, her personally or the S? I was thinking she got it personally, hence my SEP comment.

Kbairtax (talk|edits) said:

12 March 2014
The commissions I guess would be standard. She was never paid on commissions when she worked for her s-corp. She was salary. When the initial 60 days were up, she was paid a commission on the sales she made that were in line with the two other sales persons on staff at the time. I just checked with her and it was $2970 in total that she received a 1099 in her name on. She was supposed to be paid more, but was stiffed when the relationship went south and she did not want to pursue it.


For the asset sale of the biz, the S-corp got the money. The 8594 is allocated as $261,000 for goodwill. Teh majority of the funds passed out to her, some was left in the biz to wrap up expenses. The s-corp is staying open til sometime this year as there were still receivables that had to come in.

SO am I right on how to get the goodwill in there??? Intangible asset dated 1/1/12 with zero cost and sold on 8/9/13 for $261000. I do have expenses of the sale that I am going allocate ratably between Equipment and the goodwill.

Kevinh5 (talk|edits) said:

12 March 2014
Karen, please explain your question "SO am I right on how to get the goodwill in there?"


In WHERE? the 1120-s?

Kevinh5 (talk|edits) said:

12 March 2014
Are you asking whether it goes on the 8594? (it does)

The 4797 (it does, if purchased, self-created would go on Sch D).

Ckenefick (talk|edits) said:

12 March 2014
The Goodwill would go on Schedule D. It's a 1221 asset and not a 1231 asset since it wasn't purchased in this case. Hence, it was not subject to depr.

See, for example: Letter Ruling 200243002, which I think I've posted somewhere before.

The goodwill would have a $0 basis, but I'd use the incorporation date (or S-election date, if later) as the date acquired.

I do have expenses of the sale that I am going allocate ratably between Equipment and the goodwill.

No. You need to do some reading under 1060. General expenses get back-loaded against the goodwill, which acts to reduce your LTCG, go figure.

You need to book this sale up, record your gains, tie things back to the bank statement deposits, tie in Form 8594 and you will have completed the recording of the Sale transaction. If some cash later went out to her from the corp, it is just a S/H Distribution. If the consulting agreement compensation went to her personally, note it on the 8594 as applicable and indicate that it was paid directly to the shareholder/employee.

Kbairtax (talk|edits) said:

13 March 2014
Thanks Chris and Kevin.

Okay, found and read the rev rule. I think I got it. Put the goodwill on the schedule D in the s-corp return to get it to the correct line on the K-1.

Last thing to deal with in this is the Line of Credit for the s-corp that was paid with the proceeds of the sale. Any suggestions?? I am thinking the s/h should get basis for the amount paid off ($118K).....or am I WAY off base???

I am sooo tired...

Kevinh5 (talk|edits) said:

13 March 2014
you are way off base, you don't get anything for paying a corporate debt, unless the corporate debt is paid directly by the shareholder and not through the corp

The corp already deducted whatever it bought with the line of credit.

Ckenefick (talk|edits) said:

13 March 2014
This should really be with journal entries. Let me throw out some facts: (1) $200k gross proceeds (2) $118k LOC bal (3) $2k exp of sale (4) $80k net cash rec'd. Further assume $150k of gross proceeds are allocated to zero-basis Goodwill and $50k is allocated to zero-basis Equipment.

Entry #1: (1) debit Cash $80k (2) debit LOC $118k (3) debit Exp of Sale $2k (4) credit a P&L holding acct called "Gross Proceeds" for $200k. Debits equal credits.

Entry #2: (1) debit Gross Proceeds $150k (2) debit Goodwill Gain $2k (3) credit Goodwill Gain $150k (4) credit Exp of Sale $2k. Debits equal credits. Note: the "Gross Proceeds" account now has a credit balance of $50k. Also note Goodwill Gain carries a credit balance of $148k [$150k gross proceeds allocated less $2k exp of sale, which get backloaded against Goodwill. Unfair, but that's how it goes].

Entry #3: (1) debit Gross Proceeds $50k (2) credit Equipment Gain $50k. Debits equal credits. Note: the "Gross Proceeds" account now has a balance of $0. Thus, the Gross Proceeds has been fully allocated.

Also note that the LOC pay-off may have involved accrued interest, so be sure to handle that properly with part of LOC debit going to Interest Expense. At the end of the day, LOC balance s/b $0 and the accrued interest paid is deductible as usual.

It is helpful to create a Holding Account, as I've done here, to ensure the Gross Proceeds gets fully allocated. Int Exp

Ckenefick (talk|edits) said:

13 March 2014
And, you should be using journal entries here, or source entries coupled with journal entries if the transactions have already been booked. Sounds like you're just piece-mealing this together and throwing numbers on the tax return. The gains ending up on your P&L should jive with an analysis as I have prepared above. And your ending Balance Sheet should show the elimination of the LOC and the Equipment that was sold. And, the 8594 should jive precisely with the relevant amounts on the 1120S.

Kevinh5 (talk|edits) said:

13 March 2014
Chris, the line of credit was paid with cash AFTER the sale of assets. Your journal entries are incorrect. She should be crediting cash and debiting the LOC. But this is a tax question, not an accounting one.

Ckenefick (talk|edits) said:

13 March 2014
Last thing to deal with in this is the Line of Credit for the s-corp that was paid with the proceeds of the sale.

I took this to mean it was a direct payoff @ closing, like when you sell your house. If I'm wrong, no big deal. You just debit Cash instead of debiting the LOC for $118k in Entry #1. Now, there's more cash in the bank account, so you write a check to payoff the loan.

Kbairtax (talk|edits) said:

13 March 2014
Thanks to both of you. I truly appreciate the guidance.

@Kevin.....Thanks for righting me. I was overthinking this and trying to create something that is not there. I guess I had it in my head that since she is paying tax on the gain of the sale that any part of the proceeds from that used to offset corp debt would be considered contributed by her. Stupid.....

@Chris....I did journal the deal....not exactly how you did, but I used a "clearing account" and I believe I ended up in the same spot. I have to go back thru it to be sure and also have to fix the part where I put part of the selling expenses to the sale of the hard assets. I will move that all to Goodwill ($35K...expensive!!)

Yes, balance sheet shows zero assets, zero LOC. My balance sheet is off, but I think it has to do with the gain on the sold assets. I have something f-ed up there and it is throwing off the income. I have some work to do, but I think I am on the right track.

Thanks for the help!

Ckenefick (talk|edits) said:

13 March 2014
Expenses specific to a specific asset or class of asset can go against said asset/assets. But "general" expenses of sale get backloaded against GW.

Kbairtax (talk|edits) said:

13 March 2014
These were all general expenses. Broker fees, UCC search/terminations, etc.

Ckenefick (talk|edits) said:

13 March 2014
1.1060-1(c)(3)(3) Certain costs. The seller and purchaser each adjusts the amount allocated to an individual asset to take into account the specific identifiable costs incurred in transferring that asset in connection with the applicable asset acquisition (e.g., real estate transfer costs or security interest perfection costs). Costs so allocated increase, or decrease, as appropriate, the total consideration that is allocated under the residual method. No adjustment is made to the amount allocated to an individual asset for general costs associated with the applicable asset acquisition as a whole or with groups of assets included therein (e.g., non-specific appraisal fees or accounting fees). These latter amounts are taken into account only indirectly through their effect on the total consideration to be allocated.

You see, so you knock down total consideration by the expenses of sale, and then start allocating the "net" consideration starting with Class I assets all the way down the line through the other Classes. The "indirect effect" here is that these costs fall on the last assets that we allocate to: namely, Goodwill.

Nilodop (talk|edits) said:

13 March 2014
Does this work: Martin Ice Cream?

This case is really long. I would suspect that someone could find - and link to - a discussion of the salient points from this case that could be read in about one tenth the time. Anybody?

Why this case is not posted in the freezer aisle of every grocery store is beyond me…

Shortest I could find http://www.tupalo.co/bloomfield-new-jersey/martin-ice-cream-co

Pitch78 (talk|edits) said:

14 March 2014
Wow, I read the Howard case. Why would a professional enter into an employment agreement with his professional corporation that contained a non-compete clause that extends for three years past the termination of employment?

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