A Tax Saving Strategy for C-Corp Sellers

When selling a C-Corporation, most sellers will want to sell stock while most buyers will want to buy the assets.  Selling the stock minimizes the built-in gains (BIG) for sellers that carries a hefty double taxation first at the corporate level and second individually.  Buyers wish to buy assets for a number of reasons including loss of future depreciable expenses and potential increased liability.

One method to possibly reduce the impact of BIG for some businesses is allocation of a portion of the transaction to personal goodwill, defined as the value from an individual’s service to the business.

To qualify for personal goodwill, the tax authorities will need to find some of these key attributes for the business owner, including:

  • Personal relationships with customers and/or suppliers that exist with or without a contractual agreement
  • Industry reputation that gives an intangible benefit to the company
  • Technical expertise that provides identifiable economic benefit to the business
  • The absence of an employment agreement or a covenant not to compete

If a tax advisor believes this is an appropriate strategy, a valuation can be performed to estimate the value of personal goodwill.

For additional information on this subject see the article, “Personal Goodwill Avoids Corporate Tax Exposure” on Forbes.com.  (https://www.forbes.com/sites/peterjreilly/2014/06/13/personal-goodwill-avoids-corporate-tax-exposure/#3d1cbf0c21b4)

Disclaimer: Exit Strategies Group, Inc. is not qualified to provide tax advice to others.  Readers should not rely on the information in this blog for any specific transaction and should seek the advice of a qualified tax advisor.

For more information about M&A transaction structuring and business valuation, you may contact Jim Leonhard, CVA MBA at 916-800-2716 or jhleonhard@exitstrategiesgroup.com