You Make the Call - May 1, 2025

Question: Ron is a sole proprietor. Ron sold his accounting practice in 2025. The sale included office equipment, client files and goodwill self-created by the business based on Ron’s strong customer relationships with his current clients. In the sales agreement, Ron received $150,000 specifically allocated to goodwill. Ron wants to know if this amount qualifies for long-term capital gain treatment on his tax return. Is the gain on the sale of self-created goodwill considered a capital gain?

Answer: Yes. Under §1245, amortizable §197 intangibles (like purchased goodwill, customer lists, trademarks etc.) are classified as §1245 property. This means they are subject to potential depreciation recapture. Any gain on the sale or disposition of the property may be recharacterized as ordinary income to the extent of prior amortization deductions.

However, self-created goodwill and going concern value typically do not trigger §1245 recapture. Instead, the gain from selling these intangibles is generally treated as capital gain if held for over a year. This treatment is supported by §197(c)(2), which provides the exclusion of self-created intangibles as amortizable §197 intangibles and §197(f)(1), which denies depreciation recapture on goodwill and going concern value that was not acquired in a taxable transaction.

Since Ron self-created the goodwill as part of his trade or business and sold it as part of the overall sale, the gain is reported as a §1221 gain, which is taxed as a long-term capital gain.