When goodwill is created with a sales of business assets, does the seller report the amount calculated for goodwill as ordinary income? Or, is the selling price counted as capital gain on the assets sold? (the sales price is more than the FMV, since business was sold for a lump-sum, so the sales price is the FMV, ex. Selling price=$125,000; FMV of assets sold=$20,500; goodwill=$104,500.)

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Capital Gain. Is there a covenant not to compete? That would reduce the goodwill and would be ordinary income.

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There is a non-compete agreement, but there is no price associated with it. and is the total sales price divided by the percentage of FMV and applied to each tangible asset so that there is nothing on the tax return that says sale of goodwill?

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There is a non-compete with no $$ associated with it??? What did they do, write the sale contract themselves? What recourse would the buyer have if the seller violates the non-compete when there is no consideration for the contract?

As far as how to split it up there is a form that the buyer and seller have to attach to their respective returns that list how much is for fixed assets, goodwill, covenant, inventory, etc. The fixed asset number is $20,500 per your original post the remaining $104,500 needs to be split and listed on each form.

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Form 8594, "Asset Acquisition Statement Under Section 1060", is the form that both parties are to report the acquisition (principally all of the assets) of a business but not purchase the corp stock itself.

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Can you believe it?!!! The sale was done by commercial/business real estate brokers!! When asked for allocation of the sales price, they acted like I had 3 eyes.... I understand the Form 8594 Asset Acquisition. I just don't know where to report the goodwill of $104,500 on the 1120S. Line 5 other income on 1120S or ordinary gain Part II on Form 4797?

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as matt said in his initial reply, it's capital gain on 4797 (i assume this was held long term?)

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No, this is the what is left over at closing. There was never any goodwill reported on the seller's books previously to write off against, so how can it be long-term? It was just identified by the Form 8495, which says Total Sales price = $125,000, Class V = $20,500, Class VI and VII = $104,500. (Since the business was sold for a lumpsum and there was not an agreement on the individual price of assets sold, FMV was applied as the sales price for the assets and the $104,500 was what was left over. So my question still is, Where do I report the $104,500 on the S-Corp tax return? I know there is some concept here I am missing, please have patience with me!!!

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Goodwill is considered long-term gain as it is amassed over the life of the company if it has existed over 1 year. You mention 1120S so I assume this is a corporation. Usually you try to allocate a portion of the goodwill as a personal asset depending on whether the owner was instrumental in generating it, like a doctor, etc. It can be allocated partly to the company, and partly to the owner, but all this should have been specified in the sales contract! It goes on 4797 or Sche D depending on how it is allocated, as a long-term gain. In the case of a 1120S, it would be passed thru to all shareholders if none of it is deemed personal. It would not have been on the books unless it was purchased previously. It is a depreciable asset when that happens, so the new buyer will have a depreciable asset. You said there was a covenant not to compete, which is Class VI property so an amount should be allocated to it. That is ord income to the seller. Make them figure it out and come to an agreement as both 8594's need to filed and need to agree.

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>>You said there was a covenant not to compete<<

Well... if the covenant reads that the S-corp will not complete, then it is income for the S-corp to recognize, but if it is the selling shareholder not to compete, then it has nothing to do with reporting on form 8594 and it is income reported by the shareholder.

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I think it would still be on the 8594 since it was part of the sale price, but there is only one line for Class VI and VII property so there is no way to break it down on there. However, the buyer also depreciates the portion ascribed to the CNTC as a 15-yr asset, separately from the goodwill.

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Thank you everyone for shedding some light on this subject for me.

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So did you report the goodwill as cap gain of zero since cost is same as Sales price or did you report whole amount as gain with zero cost value. I have a sole proprietor with same issue.

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The goodwill in this scenario has zero basis and its entire selling price will be capital gain (guessing long-term).

I have to disagree, however, with the notion that the two Forms 8594 (buyer and seller) need to agree. Each side in the transaction is allowed to do its own allocation, *unless there's an allocation in an agreement that's signed by both of them* which I'm pretty sure there is not, in at least one of the scenarios described here.

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Is any of the goodwill capital gains?

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