Unlocking Tax Savings: Personal Goodwill Deductions for C-Corp Owners

When it comes time to sell a business, many C-Corp owners are surprised to learn that the way a deal is structured can have a huge impact on their tax bill. One strategy that can offer significant tax savings—particularly in closely held corporations—is the use of personal goodwill.

What is Personal Goodwill?

Personal goodwill refers to the value of a business that is attributable to the personal reputation, skills, relationships, or expertise of an individual owner—rather than the corporation itself. In many small businesses, especially those led by a founder or key individual, this intangible value can be substantial.

For C-Corporation owners, this distinction matters. If a deal is structured properly, the portion of the business value attributed to personal goodwill may be taxed as a long-term capital gain on the individual level rather than being subject to double taxation (once at the corporate level and again upon distribution).

Why It Matters in a Sale

In a standard asset sale involving a C-Corp, the corporation pays tax on the gain from the sale, and the shareholder pays tax again when proceeds are distributed. This double layer of tax can significantly reduce net proceeds.

However, if part of the sale proceeds can be attributed to personal goodwill, that amount can bypass corporate taxation altogether and be taxed once, at the shareholder level, often at lower capital gains rates.

For example, consider the owner of a successful dental practice structured as a C-Corporation. Most patients visit the practice specifically to see the dentist herself—not because of the company name or brand. In this case, much of the business's value is tied to the dentist’s personal reputation and patient relationships, not the corporation.

When she decides to sell, her legal and tax advisors structure the transaction in two parts:

1. The corporation sells its tangible assets, like equipment and lease rights.

2. The dentist individually sells her personal goodwill, including her patient relationships and professional reputation.

   
   

Because that personal goodwill is sold directly by the individual—not through the corporation—it’s only taxed once as a long-term capital gain. This strategy can result in significant tax savings, often reducing the seller’s overall tax burden by tens of thousands of dollars.

How Do You Qualify?

To take advantage of a personal goodwill deduction, the seller must:

• Demonstrate that goodwill is tied to the individual, not the corporation.

• Have no existing employment or non-compete agreements that assign goodwill to the company.

• Structure the transaction so that the buyer purchases personal goodwill directly from the shareholder (not the corporation).

• Obtain a separate agreement outlining the sale of personal goodwill.

  
  

This approach is most commonly used in service businesses, professional practices, and companies where the owner’s personal reputation is a key driver of value.

A Word of Caution

The IRS scrutinizes these transactions, and courts have rejected personal goodwill claims when the documentation or deal structure didn’t hold up. A properly drafted personal goodwill agreement and strong legal and tax guidance are essential.

At Legal Dealmakers, we work with sellers to structure deals strategically—helping you minimize taxes and maximize your exit. If you’re considering selling a C-Corp, we can help you evaluate whether personal goodwill may apply and ensure your deal is designed to withstand scrutiny.