Goodwill?

[zeros]

Client purchased a business from someone else and paid $10K for the small business. He received no assets, just the right to sell certain products. He will be filing a schedule C. Not real familar with this. Would this be depreciated over a certain life period. How long?

[Koss]

Goodwill

Not depreciation. Amortization. Depreciation is only for things you can see and touch.

Goodwill is a Section 197 intangible.

See the instructions for Form 4562:

Certain section 197 intangibles.

The following costs must be amortized over 15 years (180 months) starting with the later of (a) the month the intangibles were acquired or (b) the month the trade or business or activity engaged in for the production of income begins:

Goodwill;

Going concern value;

Workforce in place;

Business books and records, operating systems, or any other information base;

A patent, copyright, formula, process, design, pattern, know-how, format, or similar item;

A customer-based intangible (e.g., composition of market or market share);

A supplier-based intangible;

A license, permit, or other right granted by a governmental unit;

A covenant not to compete entered into in connection with the acquisition of a business; and

A franchise, trademark, or trade name (including renewals).

BMK

[taxxcpa]

Seller of goodwill

From the standpoint of the seller:
Would the sale of self-created goodwill be considered a capital gain or ordinary income?
Would the amount received for a covenant not to compete be ordinary income or a capital gain for the seller?
How about the sale of a client list?

[Burke]

1. Sale of goodwill is a capital asset whether self-created, or purchased. If purchased, of course, there would be basis to deduct.
2. Sale of a covenant not to compete is treated as ordinary income.
3. A client list is considered the same as goodwill.

[taxxcpa]

Thanks. Your answer very clearly covers the subject.
In researching it, I found Letter Ruling 200243002 confirms it, but less succinctly.

[New York Enrolled Agent]

1. Sale of goodwill is a capital asset whether self-created, or purchased. If purchased, of course, there would be basis to deduct.
2. Sale of a covenant not to compete is treated as ordinary income.
3. A client list is considered the same as goodwill.

Just asking about item #1 - Ignoring self-created goodwill, is the "purchased goodwill" actually a capital asset or is it more accurately a section 197 item that gets capital gain treatment under §1231? Same result but ...

[Bees Knees]

TTB, Small Business Edition, page 27-1 chart: Acquired Section 197 intangibles: Seller's treatment:

The amount that represents prior amortization is recaptured as ordinary income. Any excess is a capital gain.

[taxxcpa]

Seller-created goodwill

My copy of TTB only has 25 tabs, so I could not find your citation.

I found this in Letter ruling 200243002 in regard to goodwill that has not been subject to amortization:
Because we conclude the Goodwill is not an amortizable section 197 intangible
and is not property that is of a character subject to the allowance for depreciation
provided in § 167, we further conclude that the Goodwill sold by Taxpayer qualifies as a
capital asset under § 1221.

This is consistent with recaptured depreciation. It is only considered ordinary income if it has previously created a reduction to ordinary income either through depreciation or amortization.