How is goodwill taxed when selling a business?
Goodwill represents the value of a business beyond its tangible assets—it includes things like reputation, customer relationships, and brand strength. When you sell your business, this intangible asset is generally taxed as a capital gain rather than as ordinary income. Essentially, the taxable gain from goodwill is determined by subtracting the value of identifiable tangible assets from the total sale price.
For example, if your business sells for $1 million and the identifiable assets are valued at $300,000, the remaining $700,000 is considered goodwill. This gain is taxed under capital gains tax rules. If the goodwill has been held for more than one year, the long-term capital gains tax rates, as of 2024, are typically 0% for lower income brackets, 15% for middle income brackets, and 20% for higher income brackets.
The tax treatment can also vary depending on your business structure. For instance, in partnerships and S-corporations, the tax liability from goodwill is passed to individual partners or shareholders, rather than the business itself. Moreover, proper documentation is essential—both buyers and sellers must file IRS Form 8594, and goodwill should be reported as an IRC Section 197 Class VII intangible asset (documentation requirements).
Given the complexities involved, it is highly advisable to work with a CPA or tax professional when planning the sale of your business. Strategic planning, such as considering an installment sale method to spread the tax burden over several years, may result in significant tax savings. At Iconic, we guide business sellers through every detail of the process—from discovery to closing—and ensure you’re fully informed. To learn more about how we simplify the selling process, visit The Iconic Way.
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When selling a business, it's important to note that there are two distinct types of goodwill—personal goodwill, which is linked to individual skills, relationships, and reputation, and enterprise goodwill, which is tied to the overall business—that may be treated differently for tax purposes (research).
The tax treatment of goodwill can also be influenced by the structure of the sale; for example, executing an asset sale versus a stock sale can lead to different tax implications, offering varying opportunities for strategic tax planning (research).
