Ever wondered if the value of an ongoing business, called “going concern value”, can be taxed? This question often pops up when someone is buying, selling, or inheriting a business. In this guide, you’ll learn what going concern value means, whether it’s taxable, how it’s assessed, and what to watch out for. We’ll break down the key ideas in plain language so you can understand what matters most for your situation.

What Is Going Concern Value?

Going concern value is the extra value a business has because it’s up and running, not just because of its buildings or equipment. Imagine you’re looking at a bakery. If you only counted the ovens and the building, you’d get one number. But if the bakery is already open, has loyal customers, trained staff, and a good reputation, it’s worth more. That extra value is the going concern value.

This value is important because it covers things like experienced workers, customer relationships, and a steady stream of sales, all things that make a business work smoothly. It’s different from the value of just the physical stuff, which is usually called “asset value.”

Is Going Concern Value Taxable?

The main question: is going concern value taxable? The answer is not as straightforward as you might think. In most cases, going concern value itself isn’t taxed directly. Instead, it’s part of the bigger picture when taxing or valuing a business.

For example, if you sell your business, the price you get usually reflects both the physical assets and the going concern value. The IRS and other tax authorities typically look at the total sale price. They don’t separate out the going concern value for its own tax.

That said, how the sale is structured can affect what’s taxed and how much. Sometimes, parts of the sale tied to going concern value might be treated as goodwill, which can have its own tax rules. If the business changes hands because of inheritance, estate taxes might factor in the going concern value as part of the total value.

How Is Going Concern Value Assessed?

Assessing going concern value isn’t always simple. It usually involves looking at what the business would be worth if it keeps running as it is now. Here’s how professionals often figure this out:

  1. They start with the value of the physical assets, like buildings, equipment, and inventory.
  2. Then, they estimate how much more the business is worth because it’s already operating, has customers, and makes regular sales.
  3. This extra amount is the going concern value.

Accountants or appraisers might look at profits, customer lists, and even employee experience. The goal is to see how much someone would pay for the whole package, not just the stuff you can touch, but also the things that keep the business alive and running.

Going Concern Value vs. Goodwill

It’s easy to get mixed up between going concern value and goodwill. Both are “intangible” values, meaning they’re not tied to physical things you can see or hold. But they aren’t exactly the same.

Going concern value is about the business being operational, ready to go, with systems in place. Goodwill is more about the brand’s reputation, customer loyalty, and other hard-to-measure factors that make people want to do business with you instead of someone else.

In tax situations, goodwill can sometimes be taxed, especially during a sale. For example, if someone buys a business for more than the value of its physical assets, the extra paid is often labeled as goodwill. This amount can have different tax treatment, sometimes allowing the buyer to deduct or amortize it over time.

Tax Scenarios Where Going Concern Value Matters

Let’s look at some situations where going concern value comes into play with taxes:

Selling a Business

If you sell your business, you and the buyer will need to agree on how much of the price goes to each part: physical assets, inventory, goodwill, and going concern value. The IRS usually wants a breakdown for tax purposes. While going concern value isn’t taxed on its own, it can affect how much is assigned to goodwill or other intangible assets, which can have tax consequences for both sides.

Property Taxes

Sometimes, when valuing a property for taxes, local governments might include the going concern value if the business is part of the property (like a hotel or gas station). This can lead to higher property tax bills, so it’s something business owners should watch for.

Estate and Gift Taxes

When a business is inherited or given as a gift, tax authorities want to know its fair market value. Here, going concern value is usually included in the total valuation, affecting the overall taxable amount. While not taxed separately, it increases the value of the business for these purposes.

Practical Tips for Business Owners and Buyers

If you’re thinking about buying or selling a business, or if you expect to inherit one, here are some steps to help you handle going concern value and taxes:

  1. Get a professional business valuation. This will help you understand how much of the total value is going concern value.
  2. Work with a tax advisor who knows business sales. Tax treatment can change depending on how the deal is structured.
  3. Be clear about what’s included in the sale. Spell out what’s physical, what’s intangible, and how each part is valued.
  4. Watch out for local property tax rules if you own a business property. Sometimes, assessors add going concern value into their calculations.

Taking these steps can keep you from being surprised by unexpected tax bills or disputes down the road.

Common Questions About Going Concern Value and Taxes

Let’s answer a couple of the most frequent questions:

Does the IRS tax going concern value directly?

No, the IRS doesn’t tax going concern value by itself. It’s included in the overall value of a business during sales or inheritance, but not taxed as a separate item.

Is going concern value the same as goodwill for tax purposes?

Not exactly. They’re both intangible, but goodwill is often treated differently for taxes, especially in sales. Going concern value is about a business being operational, while goodwill is about reputation and customer loyalty.

Can property taxes include going concern value?

Sometimes, yes. In some states or situations, property tax assessors may include going concern value when figuring out how much a business property is worth. That can raise your property tax bill.

Conclusion

Going concern value isn’t taxed by itself, but it does play a big role in how businesses are valued for sales, estate planning, and property taxes. Understanding how it works can help you avoid surprises. Contact us to learn more.