Sale of S-Corp

[Unregistered]

My client is selling his S-corp in a asset-sale. Here is the breakdown 20% Inv, 20% asset, 35% Goodwill and rest covenants not to compete. The client would get a note paid over 3 years
I understand the any gain on the asset and the inventory would be ordinary income to the S-corp and flow through the K-1. What my question is about the Goodwill and covenants not to compete would that be ordinary income to the S-corp. or should this be Capital gains. Can Goodwill and covenants not to compete spread out over the term of the note?

Thanks

[OldJack]

1.Proceeds from the sale of Goodwill are taxed under the capital gain and loss rules.
2.Proceeds from a covenant not to compete is ordinary income.
3.Sale of inventory is ordinary income as you say.
4.The sale of business tangible assets and goodwil with payment over more than 1 year qualifies for installment sale reporting but the "gain" on depreciable assets upto the depreciation allowed or allowable must be reported as ordinary income in the year of sale. Goodwill and covenants, on the other hand, reports its installment sale gain as received. Suggest a separate installment sale form for the different types. Actually depending upon method of accounting you may not even need to installment sale for covenant, rather just report as ordinary income as received.

[Unregistered]

Thanks OldJack

[veritas]

I would minimize the covenant and increase goodwill.

[OldJack]

Don't forget buyer and seller are required to both file form 8594, "Asset Acquisition Statement", under code §1060.

[Unregistered]

There is also a good possibility that the covenant should be reported directly on the shareholder's return.

[veritas]

Why have any covenant? Goodwill gets better tax treatment for seller and it makes no difference to the buyer.

[OldJack]

Why have any covenant?

If a covenant exist with a dollar amount you can't just ignore it. However, as unregistered above stated the covenant not to compete may be with the individual to report and not the business. It all depends upon the reading of the agreement.

[veritas]

Unregistered is advising his client the seller. I don't think he is advising for the best tax consequences.