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What percentage of biz sale price can be allocated to the non-compete agreement without IRS scrutiny?

Looking to sell my biz that is unfortunately run as a C corp so I'm facing all kinds of tax implications in a sale. I know that any amount of the sale price that is attributed to a non-compete clause can be paid directly to the owner (shareholder) which would just be taxed once at my personal income rate. The question is how large a percentage of a sale price can be attributed to the non-compete without raising IRS eyebrows?

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Answers (2)
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The BAF Group LLC
MD

Check with a CPA.

Jan 10, 2011
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Freedom Business Brokers
Orange County, CA

mike
although I would advise you to consult a business attorney about this issue however here are my
thoughts.
Since covenant not to compete is a security in the form of a deterrent to protect from duplication of the business in question this depends on kind of business.And that is why an area has to be confined along with this allocation like Covenant not to compete 5 years 5 miles radius. If the business is at greater risk of being copied easily bigger the amount better it is. I don't think IRS would be concerned with it as this is merely an allocation of certain amount within the purchase price. This could be written off from the taxation perspective generally as a rule o thumb in 15 years even if covenant is for 5 years.There is no hard and fast rule about the percentage according to my scanty knowledge.

Jan 9, 2011