Personal Goodwill: A Brief Overview
Personal goodwill is derived from the characteristics of a person, usually the owner or key employees of a company. This is an intangible asset that cannot be physically inspected but has been found to exist through numerous Tax Court cases.
Even though personal goodwill is an intangible asset, there are ways to quantify it including; years of experience, licenses or accreditations, unique skills, areas of expertise, peer and community reputation, relationships with customers and clients, etc.,
Arguably the most important case involving personal goodwill comes from the Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998). In Martin, the Tax Court reaffirmed that when a corporation has no employment contract or non-compete with an employee, the employee’s personal relationships cannot be considered corporate assets. This position has been reaffirmed through multiple case decisions. (Bross Trucking, Inc., T.C. Memo. 2014-107 and Estate of Adell, T.C. Memo. 2014-15).
Why is Personal Goodwill Important?
Personal Goodwill is important in many Mergers & Acquisitions deals because it provides benefits to both the buyer and seller. The seller gets a reduced tax rate because personal goodwill is typically considered capital gain instead of ordinary income resulting in greater tax savings. The buyer gets the advantage of being able to depreciate personal goodwill it acquires from the seller over a period of 15 years thereby lowering its tax liabilities as well.
There are many factors and hurdles to consider regarding personal goodwill. The first of these is proving that personal goodwill exists independent of any corporate goodwill. The second is that the individual has the right to sell that goodwill. It is also highly recommended that personal goodwill is valued by a third-party, then agreed upon by both the buyer and seller.
For more information about Personal Goodwill and how it may benefit you as either a buyer or seller, please contact The Center for Financial, Legal & Tax Planning, Inc., at 618-997-3436 or by visiting our website at www.taxplanning.com.
Disclaimer – The information in the article above is only for general informational purposes. It is not to be construed as financial, legal, or tax planning advice. Please consult with your financial and/or tax advisor before making any financial decisions.