How is goodwill taxed when I sell my business?

Goodwill is usually the largest single line in a small business purchase price — the amount paid above the value of identifiable assets. How it is taxed is therefore not a detail; it can move a seller’s net proceeds substantially.

Why the allocation is negotiated

Buyer and seller have opposing interests. A buyer generally prefers more of the price allocated to depreciable assets they can write down relatively quickly. A seller generally prefers allocation away from assets that would trigger recapture of previously claimed depreciation, since recapture is ordinary income. The allocation agreed in the contract is what both parties report, so it belongs in the negotiation rather than being left to the accountants after closing.

The share sale alternative

A share sale sidesteps the allocation question entirely for the seller, because they are disposing of shares rather than underlying assets — and qualifying shares may access the lifetime capital gains exemption. That single difference is frequently worth more to a seller than several points of purchase price, which is why structure is negotiated before price is finalised rather than after.

What to do before you sign

• Model the after-tax proceeds, not the headline price — they can differ by a wide margin
• Get the allocation reviewed by your accountant before the agreement is executed
• Check whether your shares would qualify for the exemption, and how long fixing that would take
• Understand the recapture exposure on your depreciated assets

What buyers push for in the allocation

Buyers generally want more of the price on equipment and less on goodwill, because depreciable assets can be written down against future income relatively quickly while goodwill is recovered far more slowly. A seller who concedes the allocation without modelling it can hand over a meaningful share of their after-tax proceeds in a clause that looked administrative. Both sides file consistently with what the agreement says, so the negotiation happens once and binds both returns.