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tion between goodwill and a covenant-not-to-compete. The buyer will probably treat the blue sky as covenant and the seller will treat it as goodwill. This inconsistent treatment is unacceptable to the IRS. Upon audit, the IRS will adjust the tax returns for consistent treatment and assess back taxes and interest.
It is in the best interests of both the buyer and seller to have the allocation for goodwill or covenant spelled out in the contract. It is always unpleasant to have an IRS audit adjustment on a prior year return.
The tax consequences of the blue sky allocation can be significant. To get the best tax advantage, consult your accountant early in the sale negotiations.
Q. Earl Yancey, CPA, is a Viewtown resident and maintains his accounting practice in Warrenton.
Tax Guides
Available
The 1985 Farmer’s Tax Guides are now in supply at the Rappahannock Extension Office. Call 675-3619 or come by to receive your copy.
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