When purchasing a business, the issue of goodwill often arises. While there may be valid reasons for the purchase of goodwill, goodwill is not deductible for tax purposes.
There are options available to structure the purchase in a way so as to enable goodwill to be paid, but still provide a tax deduction for the purchaser. One such method is the payment of lease goodwill.
Lease goodwill is an intangible asset that reflects the value of a leased location to a business. While ordinary goodwill reflects the good name and reputation of a business, lease goodwill represents the value of the location over its ordinary cost. An example of this could be a petrol station on a busy intersection or a tourism business where its location is valuable.
The advantage of lease goodwill to the purchaser is that lease goodwill can be depreciated over the legal life of the lease. This may allow a depreciation deduction which would not be available to business goodwill.
In order to use lease goodwill, the sale and purchase agreement would need to specifically state that any value of goodwill was lease goodwill. It would also require an existing lease and a reason for the extra value assigned to the lease.