KBA Group LLP
Non-Compete Covenants and Taxes
NON-COMPETE COVENANTS AND TAXES
If KBA business owners are wondering whether non compete covenants still have any tax planning
significance after the Revenue Reconciliation Act of 1993, (RAR '93) the answer is YES! Any apparent
dilution of the non-compete agreement is misleading, as in reality they are still valuable planning tools.
Also, the IRS still continues to be interested in covenants, so you probably should be too. Some of the
tax planning issues that can still come up are covered below.
In days gone by, buyers of business assets could assign a healthy chunk of the purchase price to sellers'
covenants not to compete. The amount allocated to the covenant could then be amortized over the life of
the agreement, usually three to five years.
What changed after RRA '93 is the amortization period which was expanded to 15 years for most acquired
business intangibles, including covenants not to compete. Covenants not to compete (and other
arrangements that have the same effect) are amortizable assets under Section 197 if they are entered into
in connection with an acquisition (directly or indirectly) of an interest in a trade or business or a
substantial portion thereof. The “direct or indirect" language means that 15-year Section 197 amortization
applies to covenants entered into in connection with stock sales and in connection with acquisitions of
In the post-RRA '93 environment of asset deals, the buyers and sellers may be tempted to minimize the
allocation of the non-compete agreement and allocate more of the purchase price to assets that can be
written off or depreciated over less than 15 years. Examples include receivables, inventory, machinery and
equipment. The parties may allocate little or no value to covenants because of the relatively unfavorable
15-year amortization rule under Section 197. If the IRS discovers that a covenant has been entered