Distinguishing Personal and Business Goodwill: Planning Strategies to Minimize Tax Liability

"Goodwill is the value of a trade or business attributable to the expectation of continued customer patronage. This expectation may be due to the name or reputation of a trade or business or any other factor." Treasury regulation Section 1.197-2(b)(1). When entering into a merger or acquisition transaction, consequences can differ greatly depending upon the owner of that goodwill. The determination has substantial consequences for tax, mergers and acquisitions, and division of marital assets.

Enterprise and individual goodwill have different characteristics. For example, for business goodwill, customer loyalty may be tied to pricing, location, or convenience, while individual goodwill is based on customer relationships, knowledge, and experience. Although personal goodwill is usually associated with personal service businesses like accounting, physicians, and attorneys, almost every closely held company has some value attributable to personal goodwill.

Does the individual still own their personal goodwill? Even where an individual has created personal goodwill or performs activities that would seemingly create personal goodwill, it is important to understand whether the individual has previously transferred that goodwill to an entity through an employment or non-compete agreement.

Purchase price allocations have significant tax consequences for both buyers and sellers. Buyers may not pay for personal, non-transferable goodwill, sellers may want more allocated to goodwill and less to fixed assets, and C corporation sellers do not want to suffer two layers of tax.

Listen as our panel of experts explains the characteristics of personal and enterprise goodwill, valuation methods, and the impact of the division on income tax liability.

1. Goodwill
2. Characteristics of goodwill
   1. Business
   2. Personal
3. Tax considerations
4. Valuation methods
5. Martin Ice Cream Co. v. Commissioner and other notable cases
6. State considerations

The panel will review these and other key issues:

• Specific characteristics of personal goodwill
• The tax effects of goodwill divisions when businesses are sold
• Methods used to value personal vs. business goodwill
• The effect of noncompete agreements on the division of goodwill

Learning Objectives

After completing this course, you will be able to:

• Identify specific traits attributable to personal goodwill
• Determine methods that are used to value goodwill
• Decide how noncompete agreements could affect goodwill
• Ascertain strategies to reduce buyer or seller taxes when selling a business with goodwill

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and their respective partners and shareholders.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).