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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.
So I can better answer your question, please let me know, why are sharing the 40% with the other person?
He put in a significant amount of work into the business.
Since you are the sole proprietor of the business, you will need to report all of the income from the sale on your tax return.
However, I think it would be reasonable to deduct the 40% as a business expense and issue the other person a 1099 for his share of the money.
Well, would it make sense to file a 1065 for this transaction?
I don't think it would make sense to set up a partnership for the sole purpose of selling your sole proprietorship.
(He has invested some of his own captial in the business in the past)
okay, thank you very much!