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S corp goodwill sale

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Level 2

S-corporation client selling business for $300,000. Almost all goodwill. I am trying to compare Asset sale vs Stock Sale.

When going Asset sale route:

  • Where is goodwill sale reported on s-corporation?
  • I am playing with a mock up 1120S and 8594 does not flow anywhere. It just looks it is what is agreed between buyer and seller so the are reporting same.
  • I put sale on 4797 and income flows to line 1 and he gets QBI. I do not think this is correct.
  • Another try and I put on page 3, schedule K, line 10 (other Income) and then on 1040 put sale as net Long-term gain not portfolio income. This seems more correct, but still not sure.
  • Anyone articles anyone is aware of?
  • Any suggestions?
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6 Replies 6
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Level 11

The seller isn't selling an asset called "goodwill,"(unless she had previously purchased assets including GW), she is selling assets for more money than her adjusted basis in the assets. The amount of the sales price that is more than the FMV of those assets is the "goodwill." Although there could be customer list, too.

On the books of the seller is the sale of all assets less adjusted basis. Since most is GW, most of the gain will be capital gain. On the 8594 is the FMV of the other assets and the GW. On the 4797 goes the sale of the other assets, (possibly getting depreciation recapture, which is ordinary income), and the GW goes on Schedule D.

** I'm still a champion... of the world! Even without The Lounge.
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Level 2

No goodwill purchase. S-corp started in 2006.

Just to clarify, all goodwill is long-term, correct?

Then on 1040, I make an adjustment on Form 8960 5c to adjust so not subject to Net Investment Income Tax, corrrect?

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Level 11

If you were able to sell and collect GW within 11 months and 29 days, then why wouldn't it be short term?

IDK about the 8960 calculation.

 

** I'm still a champion... of the world! Even without The Lounge.
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Level 12

@Accountant-Man 

I think the reference made to GW and 15 years was meant as pertaining to the buyer's preference for an asset sale, not the seller's situation.

Reasons to do a stock sale instead would relate to the scenario of shareholders, an ongoing concern, etc, of course. I didn't see where anything had been stated as decided, so I asked.

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Level 12

It seems like you've settled on Asset sale, not sale of the corporation.

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"Level Up" is a gaming function, not a real life function.
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Level 2

My understanding is that 75%+ of small businesses are sold via asset sales and not stock sales. Buyers want it that way (or are advised by their lawyers) because then they can amortize the goodwill over 15 years. Also, they are not liable for the past.