S Corp.-Non-Compete

[Bird Legs]

Facts: Client, sole owner, stockholder of S Corp. The S Corp. owns a building, land,
equipment and inventory.
The owner got tired of operating the company, so she sold the equipment & inventory.
S Corp. retained the bldg & land.
The company that purchased the equip. & inventory wants to allocate part of sales
proceeds to a noncompete agreement.
Question: Would this noncompete agreement apply to both the S Corp. and to
the owner, stockholder, as an individual? What about the amount allocated to
the noncompete? Would this go to her as an individual or the the corp.?
Recognizing that the S Corp. would pass all of this through to stockholder on K-1.
Sometimes I start rambling and not focusing. Hope I made the question under-
standable.
Thanks for all help in this.

[veritas]

1 Why would the company buying inventory and equipment want to reclassfy as non-compete?

2. What does the sale agreement say?

[Bird Legs]

Non Compete Agreement

The buying company wants to classify part of the sales price to Non Compete.
Sales Price $50,000. Non Compete $10,000. Equipment & Inventory $40,000.
The amount for non compete & equip. & Inv. are estimates.
Have not seen the actual sales contract.
Client just called this afternoon and said this is what the buyer would like to do.
Client wanted to know the tax ramifications of this.
Told her that since this is an S Corp. that it will flow through to her anyway.
Thanks for any info you can furnish.

[veritas]

don't see where it makes any difference to your client. All ordinairy income,

[sea-tax]

The buying company wants to classify part of the sales price to Non Compete.
Sales Price $50,000. Non Compete $10,000. Equipment & Inventory $40,000.
The amount for non compete & equip. & Inv. are estimates.
Have not seen the actual sales contract.
Client just called this afternoon and said this is what the buyer would like to do.
Client wanted to know the tax ramifications of this.
Told her that since this is an S Corp. that it will flow through to her anyway.
Thanks for any info you can furnish.

Bird Legs,

Only speculating because I am not familar with texas law but I think you have a sales tax.

In washington when you by a business you want as much allocated to goodwill and non-compete because you don't have to pay business and occupation tax(sales tax) on these items only on equipment.
This may be why the buyer wants to allocate it this way to save some taxes for him. I don't think it really makes a difference to your client in a tax sense. However she may not want a non-compete if she would like to continue similar operations in the future.
I hope that helps and like I said it is just a guess. I know up here in washington it would not matter . Good Luck

[veritas]

Sea-tax may be correct. So if the goal is to create intangibles which are not taxed for sales tax then some should be goodwill which gives your client an income tax break. Everybody is happy.

[Bird Legs]

Texas Sales Tax

The seller would not collect sales tax on the equipment. The buyer, however, would
have to pay the state a use tax on the equip. purchased.
I was just curious about the non compete agreement. If the payment for it would go to
the corp. Of course, tax wise it won't matter. Through S Corp. it will flow to her on K-1.

[sea-tax]

The seller would not collect sales tax on the equipment. The buyer, however, would
have to pay the state a use tax on the equip. purchased.
I was just curious about the non compete agreement. If the payment for it would go to
the corp. Of course, tax wise it won't matter. Through S Corp. it will flow to her on K-1.

I realize the seller would not collect sales tax I mentioned it because I thought it may be the reason the buyer would want to allocate the sale as such.

yes the payment would go to corp. i believe it is reported on form 4797 if I am not mistaken. The non-compete is between the seller ie-Scorp and the buyer . Therefore reported on s-corp return. Your are right the gain is reported on sch k-1 .