Sale of Schedule C - Sandwich Shop

[Yardley CPA]

Client has small (single owner LLC...Schedule C for both Federal and State) sandwich shop that he has owned for many years. He is selling the business for $50K. My client does not own the building and total assets owned amount to less than $20K.

The buyer asked how much of the sale price should be considered goodwill? I have little experience with the sale of businesses, so I am seeking opinions here. I believe all proceeds received by my client should be treated as ordinary income and there is no goodwill.

Based on this limited information, I would appreciate your thoughts.

[Crank]

Excellent question, hopefully someone who has experience with this will jump in. I believe that there could be goodwill to the extend that the sales price exceeds the book value of the assets (or owners equity). However, that is just an off the cuff guess as I don't have any real world experience with this and haven't done the research. Just drawing on past accounting education ... which was almost 20 years ago.

[ILLMAS]

"I believe all proceeds received by my client should be treated as ordinary income and there is no goodwill."

Not so fast, what about name of the business, it's customers, they have to be worth something, If I were to put a price on them based on the information you provided, the price should be around 30K for goodwill.

MAS

[Lynn EA USTCP in Louisiana]

Use form 8594, Asset Acquisition Statement, via which both the seller and the buyer report the assets sold and purchased. It will walk you through the various categories of assets; anything left over after itemizing the tangibles is goodwill.

[BulldogTom]

This is a pretty straigtforward transaction. The assets that are being sold need to be itemized (hopefully you have an asset schedule for depreciation purposes) and priced at the agreed upon FMV. Your client will sell all the assets and they will flow through the 4797. The remainder will be goodwill.

As lynn EA said, use the form and it will walk you through the process.

Tom

Hollister, CA

[jshtax]

Any amount of the sale greater than the FMV of the assets would be considered goodwill. The amount of FMV over book value up to the original cost could be ordinary income/depreciation recapture. Ideally you want to structure so assets are sold at a FMV close to book value and the majority of sale is long term capital gain. If I am off base in my thinking please chime in.

[jshtax]

Use form 8594, Asset Acquisition Statement, via which both the seller and the buyer report the assets sold and purchased. It will walk you through the various categories of assets; anything left over after itemizing the tangibles is goodwill.

Interesting I have never used this form.

[Guest Taxed]

Lynn is correct. Form 8594 says:

Both the seller and purchaser of a group of assets that makes up a trade or business must use Form 8594 to report such a sale if goodwill or going concern value

attaches, or could attach, to such assets and if the purchaser's basis in the assets is determined only by the amount paid for the assets.

[kcjenkins]

Use form 8594, Asset Acquisition Statement, via which both the seller and the buyer report the assets sold and purchased. It will walk you through the various categories of assets; anything left over after itemizing the tangibles is goodwill.

One of the best things about using this form is that each side gets a copy, so there is no problem later of different values leading to audits.

[michaelmars]

many states tax the transfer of the assets as an event subject to sales tax so keep that in mind.

[Yardley CPA]

Thanks for all the feedback.