Ever wondered what happens when a business is sold, inherited, or transferred? One important part is figuring out what the business is worth, not just by its assets, but as a whole, working company. This is where the term “going concern value” comes in. In this article, you’ll learn what going concern value means, why it matters, and most importantly, how is going concern value taxed if you’re a business owner or inheritor. We’ll keep things simple and practical, with real-world examples and plain language.

What Is Going Concern Value?

Let’s start with the basics. “Going concern value” means the total value of a business as it currently operates. It doesn’t just look at what the buildings, equipment, or inventory are worth if you sold them off one by one. Instead, it counts the business’s ability to keep making money, thanks to things like its reputation, customer base, and the team working together every day.

Think of it like this: If you bought a pizza shop, you wouldn’t just pay for the ovens and tables. You’d also be paying for the shop’s good name, its regular customers who come back every week, its trained staff who know how to run things smoothly, and maybe even its secret sauce recipe. All of that adds up to the going concern value.

Some people confuse going concern value with “liquidation value.” Liquidation value is what you’d get if you shut down the business and sold everything quickly, like in a closing sale. Going concern value is almost always higher, because it includes the “living” parts of the business: its reputation, systems, and ability to make future profits.

Why Does Going Concern Value Matter for Taxes?

The way a business is valued can change the amount of taxes owed when the business is sold, transferred, or inherited. If the tax authorities only looked at the physical stuff (furniture, computers, inventory), you might pay less tax. But if they consider the whole going concern value, including things like brand and customer loyalty, the value (and possible tax bill) could be much higher.

This matters most when:

  1. A business is sold to someone else.
  2. Ownership is transferred, such as in a family succession.
  3. Someone inherits a business after an owner’s death.
  4. The business is being valued for property tax or local business tax purposes.

In all these cases, the IRS and state tax agencies want to know the real value so they can calculate the right taxes. If you ignore going concern value, you might end up underpaying or overpaying taxes. And that could attract penalties or even audits.

How Is Going Concern Value Determined?

Figuring out going concern value isn’t as simple as adding up receipts. Usually, a business appraiser or valuation expert will look at several parts:

  1. Tangible assets: These are things you can touch, like buildings, equipment, and inventory.
  2. Intangible assets: These are things you can’t hold, such as brand reputation, trademarks, customer lists, and even special business processes or know-how.
  3. Earning power: This is a big one. It’s about how much profit the business makes year after year, and how likely it is to keep making that money in the future.

The appraiser gathers financial records, reviews sales and expense reports, and often talks to the owner and staff. They might look at recent sales of similar businesses in the area. In some cases, they’ll use formulas based on future expected profits. The goal is to estimate the business’s full value as a working operation, not just the value of its separate pieces.

For example, a gas station with a steady stream of loyal customers, good employees, and a trusted brand will be worth much more as a running business than if you just sold off the pumps and land. That difference is the going concern value.

How Is Going Concern Value Taxed in Practice?

Now, let’s get to the main question: how is going concern value taxed?

The answer depends on the situation. Here’s how it typically works in three of the most common cases.

1. Business Sale

If you sell a business, the total sale price is usually split into different parts. Some of it is for equipment, inventory, or real estate. The rest is for goodwill and intangibles. Goodwill is a big part of going concern value. Each part may be taxed differently. For example:

  1. Equipment or inventory may be taxed as ordinary income or as capital gains, depending on how long you owned them and how they’re classified on your tax return.
  2. Goodwill is often taxed at the capital gains rate, which is usually lower than regular income tax rates.

Let’s say you’re selling your coffee shop. The coffee machines, tables, and chairs are tangible assets. The shop’s strong brand, loyal customers, and trained staff make up the goodwill. When you sell, you and the buyer agree on what part of the price goes to each category. The IRS requires you both to report this breakdown using IRS Form 8594, “Asset Acquisition Statement.” This helps make sure both sides pay the right taxes, and it reduces the chances of future disagreements.

2. Inheritance or Gift

When someone inherits a business, the going concern value is used to figure out estate or gift taxes. The total value (including both physical and intangible parts) is calculated as of the date of the owner’s death or transfer. Any estate tax owed will be based on this number. The inheritor usually gets a “stepped-up basis,” which means they only pay capital gains tax if they later sell the business for more than this new value.

For example, if you inherit a family bakery worth $500,000 as a going concern (including reputation, recipes, and customers), and you later sell for $520,000, you’d only pay capital gains taxes on the $20,000 increase. This step-up can save families a lot of money on future taxes.

3. Property Tax Assessments

Sometimes, local governments assess property taxes on businesses using the going concern value. This means they might include both the building and the value of the business operating inside it. The rules vary by state and locality. Some places only tax the real estate, while others consider the whole business’s value. This can lead to higher property tax bills if the business is thriving. It’s important to check your local rules and ask a tax expert if you’re unsure.

Common Tax Challenges and Mistakes

Valuing a business can be tricky, and there are a few common hurdles that trip up owners and families:

  1. Overlooking intangible assets. Many owners focus on buildings and equipment, forgetting about things like brand value or customer loyalty. These intangibles can be worth more than the physical stuff.
  2. Disagreement on value. Sellers and buyers, or family members, often have different ideas about what the business is worth. A formal appraisal can help, but it’s still common to see disputes end up in court or with the IRS.