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Lane
Lane, JD, CFP, MBA, CRPS
Category: Financial Software
Satisfied Customers: 10143
Experience:  Highly experienced in professional tax products, Microsoft Office - power Excell user - as well as Windows, Linux & iOS operating systems.
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How do I record the sale of an intangible asset that we

Customer Question

How do I record the sale of an intangible asset that we bought for $1.7m and we are selling it for $3m but payable at $200k per year over 15 years. The purchase price is recorded as Goodwill in the balance sheet. Do I record the sale, showing a profit of $1.3m now and then create a loan to the buyer (it is a management buy-out) that will be paid off over the 15 years?
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Customer: no thanks
Submitted: 2 months ago.
Category: Financial Software
Expert:  Mark Taylor replied 2 months ago.

Hi, my name is Mark. I will be happy to help with your questions. Please give me a few moments to prepare a response.

Customer: replied 2 months ago.
OK
Expert:  Mark Taylor replied 2 months ago.

What you have is an installment sale. You would recognize the gain as you receive payments. As you mentioned you have a total gain of $1.3 million. So you would recognize 1/15 of the gain assuming that you receive a $200,000 payment each year. 1.3 million x ($200,000 / $3,000,000).

Expert:  Mark Taylor replied 2 months ago.

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Expert:  Lane replied 2 months ago.

Hi. My name's Lane ... It appears that that the expert has opted out.

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First, you DO have an installment sale ... any time proceeds from the sale of a capital asset (outright sale of an intangible with no rights reserved, is a capital transaction) are received in more than one year, you have an installent sale (by default, unless you elect out)

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If royalties or other rights remain, then this is considered licensing and not a capital transaction.

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Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received. You do not include in income the part of the payment that is a return of your basis in the property. Use Form 6252 (PDF), Installment Sale Income, to report an installment sale in the year the sale occurs and for each year you receive an installment payment.

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You must also include in income any interest as ordinary income.

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The gain for each year of the installment period is calculated as follows:

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Annual GainReported =Total Gain/Contract Price× Annual Payment

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Hence your reportable annual gain is (3MM - 1.7MM)/3MM x amount received in the tax year.

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If the installment sales contract does not provide for adequate stated interest, part of the stated principal may be recharacterized as unstated interest or original issue discount for tax purposes, and taxed accordingly.

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Each payment on an installment sale usually consists of the following three parts.

  • Interest income.

  • Return of your adjusted basis in the property.

  • Gain on the sale.

Expert:  Lane replied 2 months ago.

Please let me know if you have any questions at all.

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And if you DON'T have other questions Your positive rating … (by using those the stars or faces on your screen, and then clicking “submit”) …would be appreciated!

Otherwise I receive no compensation for the work.

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Thank you,

Lane

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I hold a law degree, with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986

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