Goodwill in Asset Sales?

[bluesky]

I have a client who just took over a gift shop from the previous owner. On the bulk sale paper (AU-196.10) , which is notification of sale/transfer/assignment in Bulk for NYS  Department of Taxation, it indicates tangible personal property is $15K, and intangible property is $300K, so the total sales price is 315K. 

My client (the purchaser) said he paid $300k for the effort previous owner put in the business attracting customers into the store and having stable sales. Do I take this intangible property as goodwill? Should i amortize this amount every year for 15 years on this client's Form 1020, and then recapture the previous amortization when my client sell his business? 

[sjrcpa]

Sounds like amortizable goodwill to me.

[bluesky]

Hi, if it the amortizable goodwill, my client would have $20k amortization deduction each year for 15 years, which keeps making the company has loss carryover over each year. In this case, do i need recapture all the amortization when he sells the business at the end of 15 year and realize $300k long-term gain if he get paid this amount from his buyer as well?

Or should i just keep the intangible asset there, not amortize at all. By the time he sells the shop, just realize the gain in amount of difference of intangible asset he purchased and sold. 

[sjrcpa]

If your client is going to have losses for 15 years he's probably not generating goodwill.

But yes you amortize it over 15 years.

Amortization reduces the basis in the goodwill.

If he sells the goodwill later, the difference between the sale price and the adjusted basis of the goodwill is a capital gain.

And amortization reduces ordinary income at regular tax rates while LTCG is taxed at a lower rate (at least for now).

[Mimbreno]

I think you should re-visit your client's valuations as I can only presume there was inventory that has not been accounted for.  That makes me wonder - what else?

[bluesky]

Hi, sorry for the late response due to  my office relocation. 

Your answer put me rethink of the so called "goodwill" classification. I went back and pulled out my other client's return who has similar situation with the gift shop owner, and realized returns prepared by his previous CPA did not either show "goodwill" asset, nor the "15 years amortization". 

Is it possible his previous CPA just see the payment as part of cost, not capitalized it at all, and deduct the original cost from proceed when the owner sell the store?