How do I report an installment sale for goodwill and non-compete assets on a 1120 s return?
With so many complex issues to consider, a section
338(h)(10) election can be a complex transaction that may
not be appropriate for all S corporation sellers or buyers. A section 338(h)(10) election will adjust the
tax basis of the S corporation’s assets in the hands of
the buyer to fair market value.
As an alternative in this type
of transaction, the portion of an S corporation’s asset
value that can be attributed to the “personal goodwill”
of the company’s owners or executives is allocated and
segregated from the total asset value. The proceeds of
that goodwill are reported as a gain to the shareholder
to whom the goodwill relates and are treated as
long-term capital gains. For S corporations with
built-in gains, shifting purchase price to a shareholder’s
personal goodwill may limit the double taxation that
results from the built-in gains tax. The buyer benefits
because it can deduct the purchase price associated
with personal goodwill over 15 years
The sale may completed pursuant to installment sale rules, which involves disposition of property at a gain, where at least one payment is to be received after the tax year in which the sale occurs. This option offers the advantage to the seller of receiving payments over time and only including in income each year the part of the gain received that year.