When you buy a business, you don’t want the seller to turn around, create a similar new business, and start competing with you.
Okay. That’s obvious, and you already know you’ll need a noncompete agreement.
What you may not know is that noncompete agreements have very real tax consequences.
Want to learn how the IRS treats your tax deductions as the buyer of a business when you negotiate a noncompete agreement with the seller?
Read my new article titled Tax Tips: Buying a Business? Tax Planning for the Noncompete Agreement.
Three ways our fact-filled article can help you:
- You’ll learn the tax implications of buying a business’s assets versus buying its stock. When you make an asset purchase you have to amortize purchase-price amounts allocated to most intangible assets. This also goes for amounts allocated to noncompete agreements. When you buy an incorporated business’s stock, you’d probably be better off allocating more of the purchase price to any noncompete agreements and less to the value of the stock. All will be explained when you read the full article.
- We’ll also explain things from the seller’s point of view. The seller of a business must treat amounts allocated to noncompete payments as higher-taxed ordinary income. The good news is, noncompete payments are not subject to the dreaded self-employment tax. In a stock purchase/sale transaction the seller will probably prefer to allocate more of the sale price to the value of the stock and less to the noncompete agreement. You’ll get all the details when you read the full article.
- We’ll tell you why you need to file Form 8594. This is important! Any allocation of a purchase or sale price to a noncompete agreement must be reported to the IRS on Form 8594. To avoid triggering an IRS audit, you and the seller should report the same allocation to noncompete payments on your respective Forms 8594. You’ll get the whole story when you read the full article.