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DanielleCPA
DanielleCPA , Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 781
Experience:  CPA experienced in tax and financial planning
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Is the sale of my business considered capital gains tax or

Customer Question

Is the sale of my business considered capital gains tax or personal tax
Submitted: 5 years ago.
Category: Finance
Expert:  DanielleCPA replied 5 years ago.

DMC :

Hi and welcome to Just Answer! I'm happy to help answer your Finance questions. Feel free to interject at any time if you need clarification.

DMC :

What type of business entity is your company? Sole proprietorship, corporation, LLC?

Customer:

Its an S Corp. I am only selling a portion of it. What is occurring is I run two companies under the S Corp. The one I am selling is a license I purchased to rep their product in a certain area. The company is now being bought out, so I am selling my license back to them for shares of their stock approximately 295,000 which will be then sold to the larger company in exchange for a mixture of cash and publicly traded stock

DMC :

So you are just selling the license, correct?

Customer:

yes

DMC :

Do you know if you were amortizing the cost of the license on your tax return?

Customer:

I don;t believe so

DMC :

How did you account for it when you purchased the license? Did you expense it?

DMC :

Is the license held in your personal name or in your S corp's name?

Customer:

Yes, I believe we expensed it as a business purchase It was only 7,500.00 and now it is selling for close to 800k. It is in the S Corp name

Customer:

hello?

DMC :

I'm here...just typing out your answer.

Customer:

no problem

DMC :

What you describe is not the sale of your business (i.e. not the sale of the shares of the business and not the sale of all the business assets/liabilities to an outside party, it is simply the sale of an asset. The tax treatment is different.

My intrepretation would be as follows. I would consider the license to be a Section 197 intangible asset, much like goodwill, patents, customer lists, etc. While the code does not directly apply Since you expensed it initially, you would have no basis in the asset. Gains and losses on the dispositions of intangible assets fall under Section 1231. Section 1231 gains are generally treated as ordinary up until the amount of depreciation/amortization taken and the rest is considered to be long-term capital gain. Since you expensed the asset originally, I would consider the full $7,500 purchase price to be recapture upon the disposition and the rest capital gain. Disposition of intangible assets are discussed in detail wothin IRS Publication 544 (see page 25). 1231 gains and losses are also discussed within this publication.

Customer:

so in this case what portion would be taxed as ordinary income and what would be taxed as long term capital gain

Customer:

the 7500 would be ordinary income tax and anything after would be long term cap gain correct?

Customer:

by the way i have had three accountants look at this and your answer was by far the clearest and easiest to understand

DMC :

Thank you. Please let me know if you have any follow-up questions. If not, please hit the green accept button. Thank you!

DanielleCPA and other Finance Specialists are ready to help you
Expert:  DanielleCPA replied 5 years ago.
Sorry, I did not see your other question. Yes, the 7,500 would be ordinary income tax and the rest long-term capital gain.