Goodwill is the expectancy that customers will continue to patronize a certain place of business and is based on the continuation of a business relationship. Goodwill cannot exist as a separate item or be sold separately from a business entity having a locality or name.  Goodwill is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor.

Information is provided below for both the purchaser and seller of goodwill.  In either instance the screens to be completed in the TaxAct® program are in the Amortization section, which follows the Depreciation entries in any of the business sections of the Q&A. Also included below is information regarding IRS Form 8594 Asset Acquisition Statement Under Section 1060, which is required in some situations.

For the PURCHASER of Goodwill:

Goodwill is not a depreciable asset, but is a Section 197 intangible asset that must be amortized. According to IRS Publication 946 How To Depreciate Property, page 111:

Goodwill: An intangible property such as the advantage or benefit received in property beyond its mere value. It is not confined to a name but can also be attached to a particular area where business is transacted, to a list of customers, or to other elements of value in business as a going concern.

Intangible property: Property that has value but cannot be seen or touched, such as goodwill, patents, copyrights, and computer software.

Note that if the computer software meets certain tests (see the Intangible Property section in Publication 946), then it is possible to depreciate that asset.

Per IRS Publication 535 Business Expenses, page 28:

Section 197 Intangibles

Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income.

CAUTION! You may not be able to amortize section 197 intangibles acquired in a transaction that did not result in a significant change in ownership or use. See Anti-Churning Rules, later in the publication.

Your amortization deduction each year is the applicable part of the intangible’s adjusted basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 months). The 15-year period begins with the later of:

• The month the intangible is acquired, or
• The month the trade or business or activity engaged in for the production of income begins.

You cannot deduct amortization for the month you dispose of the intangible.

If you pay or incur an amount that increases the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it over the remainder of the 15-year period beginning with the month the basis increase occurs.

You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible.

Tax-exempt use property subject to a lease. The amortization period for any section 197 intangible leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), shall not be less than 125 percent of the lease term.

Cost attributable to other property. The rules for section 197 intangibles do not apply to any amount that is included in determining the cost of property that is not a section 197 intangible. For example, if the cost of computer software is not separately stated from the cost of hardware or other tangible property and you consistently treat it as part of the cost of the hardware or other tangible property, these rules do not apply. Similarly, none of the cost of acquiring real property held for the production of rental income is considered the cost of goodwill, going concern value, or any other section 197 intangible.

Section 197 Intangibles Defined

The following assets are section 197 intangibles and must be amortized over 180 months:

1. Goodwill;
2. Going concern value;
3. Workforce in place;
4. Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers;
5. A patent, copyright, formula, process, design, pattern, know-how, format, or similar item;
6. A customer-based intangible;
7. A supplier-based intangible;
8. Any item similar to items (3) through (7);
9. A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals);
10. A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business;
11. Any franchise, trademark, or trade name; and
12. A contract for the use of, or a term interest in, any item in this list.

CAUTION!  You cannot amortize any of the intangibles listed in items (1) through (8) that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business.

To enter amortization in TaxAct, go to the Q&A for the type of business to which your goodwill applies. In the Amortization section (immediately following the Depreciation entries), enter the goodwill information.

For the SELLER of Goodwill:

Information on the sale of a business is outlined in IRS Publication 544 Sales and Other Dispositions of Assets, under the section starting on page 24 titled Other Dispositions. 

Specifics for the sale of Section 197 Intangibles start on page 25:

Dispositions of Intangible Property

Intangible property is any personal property that has value but cannot be seen or touched. It includes such items as patents, copyrights, and the goodwill value of a business.

Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset.

Publication 544 also explains special rules that apply to certain dispositions of intangible property.

To enter the sale of Goodwill in TaxAct, go to the Q&A for the type of business to which your goodwill applies. In the Amortization section  (immediately following the Depreciation entries, after the screens containing the goodwill information) is a section for the sale of goodwill.  The information will then be transferred to the appropriate section of IRS Form 4797 Sales of Business Property (depending on the date of purchase and sale).

You should also determine if you need to file IRS Form 8594 Asset Acquisition Statement Under Section 1060:

Purpose of Form

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.

Form 8594 must also be filed if the purchaser or seller is amending an original or a previously filed supplemental Form 8594 because of an increase or decrease in the purchaser’s cost of the assets or the amount realized by the seller.

Who Must File

Generally, both the purchaser and seller must file Form 8594 and attach it to their income tax returns (Forms 1040, 1041, 1065, 1120, 1120S, etc.) when there is a transfer of a group of assets that make up a trade or business (defined below) and the purchaser’s basis in such assets is determined wholly by the amount paid for the assets. This applies whether the group of assets constitutes a trade or business in the hands of the seller, the purchaser, or both.

If the purchaser or seller is a controlled foreign corporation (CFC), each U.S. shareholder should attach Form 8594 to its Form 5471.

Exceptions. You are not required to file Form 8594 if any of the following apply.

• A group of assets that makes up a trade or business is exchanged for like-kind property in a transaction to which section 1031 applies. If section 1031 does not apply to all the assets transferred, however, Form 8594 is required for the part of the group of assets to which section 1031 does not apply. For information about such a transaction, see Regulations sections 1.1031(j)-1(b) and 1.1060-1(b)(8).
• A partnership interest is transferred. See Regulations section 1.755-1(d) for special reporting requirements. However, the purchase of a partnership interest that is treated for federal income tax purposes as a purchase of partnership assets, which constitute a trade or business, is subject to section 1060. In this case, the purchaser must file Form 8594. See Rev. Rul. 99-6, 1999-6, I.R.B. 6, available at http://www.irs.gov/pub/irs-irbs/irb99-06.pdf.

To enter the information for Form 8594 from within your TaxAct return:

TaxAct Online:

1. Click the Forms tab on the right side of the screen
2. Click View complete Forms list at the bottom of the box
3. Expand the Federal Forms folder and then expand the Forms and Schedules folder
4. Scroll down and select Form 8594 – Asset Acquisition Statement 
5. Click Add to create a new copy of the form or click Review to review a form already created
6. Enter the information directly on the form

TaxAct Desktop:

1. Click on Forms in the toolbar
2. Expand the Federal view and then expand the Forms and Schedules view
3. Scroll down and double click Form 8594 – Asset Acquisition Statement
4. Enter the information directly on the form