The rules for the tax treatment of non-competition agreements are simple, provided the parties understand the tax treatment of these alliances and the willingness to do business. Goodwill is considered an investment and the seller can process the amount allocated to goodwill at advantageous rates of return. Unfortunately, the buyer will be denied any tax deduction, as it is assumed that the goodie has an indeterminate utility term. The bundessteuerrecht imposes that a part of the purchase price is attributed to a confederation, not to the competition. This leads to potential pitfalls for the unwary. In general, when a business is sold, most of the profit to the seller is long-term capital gains that are taxed at attractive prices. However, any amount allocated to the federal government for non-competition is an ordinary income that is taxed at the highest individual rate applicable to the seller. This is why most sellers want to allocate a small amount to this item. The buyer is indifferent from a tax point of view, because the costs are depreciated in the same way as the cost of the value.
However, there is an unscathed reason for the purchaser to allocate a significant amount to the Confederation. If the seller violates the Confederation and introduces a new transaction in the same territory, the buyer can take legal action. If the buyer succeeds and the seller is found to be aggrieved, the buyer must prove damages. The seller`s lawyer will inform the court that the buyer and seller have already set the amount of the damage and have included it in the original contract. The lawyer will then show the court the amount that both parties have allocated to Confederation and ask the court to award damages of that amount. In my own practice as a CPA and a tax and business lawyer in San Francisco, I have seen service companies sold for millions of dollars, with a sum that has been allocated to the Federal Government for not competing for only ten thousand dollars. If the seller decides to take over the business and ask his former customers in direct violation of the federal government, that might be his only price. The Act defines a « restrictive pact » as « an agreement, a business entered into or a waiver of a benefit or right of the subject, whether legally enforceable or not, that does not impair the acquisition or provision of goods or services by the subject or by any other subject who is not related to or affect the subject. one way or another. , with the exception of an agreement or business: (a) that owns the property of the subject or (b) that corresponds to an obligation, as described in point 49.1 of the Act, which is not a provision, unless the public service obligation relates to a right to property or services acquired by the subject unless it is fair market value. » The above definition is largely a stop and includes, among other types of restrictive agreements, competition and non-competition exemption agreements. The total tax bill of seller A`s shareholder is calculated as follows: the first $500.00 is the collection of the base and is not taxed.
The next $434,550 is capital gains that are taxed at 15% (the shareholder is single) for $65,182.50 in taxes. The remaining capital gain of $1,415,450 ($2,350,000 – US$500,000 (basic recovery) – US$434,550) is taxed at 20% for $283,090 in taxes. Payments under the advisory agreement are taxed at normal income rates (including no other income and no deduction) for a total of USD 33,000 ($11,000 per year for 3 years) for a total tax bill of $381,272.50.