Level 4

sale of a business by sole proprietor

Forum|Forum|2 months ago
April 29, 2026
2 replies
54 views

How is the basis calculated when selling a book of business as the only asset?

ProSeries Basic

S

strongsilence

Level 10

Hi Young

His/her tax basis is generally what he/she paid to acquire the asset, plus certain adjustments.

If he/she built the book of business yourself (most common case), the tax basis is typically $0 because the value (client relationships, reputation, recurring revenue) was created through your own labor, and you can’t capitalize those internal costs into basis.
If he purchased the book of business from someone else your basis is what he paid for it, plus any acquisition costs (legal fees, broker fees, etc.), adjusted for amortization.

Also, See form 8594 and instructions. It's a good introduction to the types of assets sold by a business.

BobKamman

Level 15

Was there a contract that specified how much was for goodwill, and how much was for a covenant not to compete?

Y

Young-TPAuthor

Level 4

There is a contract that states buyer agrees to purchase "Book of Business" defined as the rights to all insurance policies, client lists, renewal rights, and records associated. Non-Compete for a period of 3 years the seller shall not directly or idirectly engage in sale or servicing of insurance products within a 50 mile radius. The seller shall not solicit or attempt to move any clients included in the book of business to another agency. She did build the business but I have read that the BoB is valued by sellers using a multiple of revenue aiming for a 26 industry average of 1.5x-3.0x annual commission. This is why I'm confused about the zero basis.

sjrcpa

Level 15

It's zero basis because as she built the business she deducted all of her costs of doing business.

Per @BobKamman 's question and your answer, part of the sale price should be allocated to the covenant not to compete.

"I have read that the BoB is valued by sellers using a multiple of revenue aiming for a 26 industry average of 1.5x-3.0x annual commission. " So? That might be educational, but what matters is what the buyer and seller agreed to.

The more I know the more I don’t know.

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