Accepted Answer

Hi Eric,

According to IRS rules, the buyer and seller must use the same allocation, so the allocation will have to be negotiated and put in writing as part of the sales contract. Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred.

 

Your taxable income is calculated for each asset = (selling price) - (basis); If you purchase the asset - the basis is its purchase price; The basis should be adjusted by any improvement expenses and depreciation.

For asset sale following are income treatment:

• Fixed Assets - capital gain (long or short term depending on time interval owned); depreciation recaptured - regular income.
• Inventory and Supplies - regular income
• Seller Intangibles/Customer Relationships - assuming created during the normal business procedure - regular income
• Consulting agreement - assuming created during the normal business procedure - regular income
• Non Competition Agreement - if any - regular income.

Ifs you are selling your business using installments - the buyer will typically pay a down payment, and then the seller finance the rest so that the buyer will pay in installments over a period of time, determined in the sales agreement plus an interest.

The main benefits to installment sales is that this will generally bring a higher price than bank-financed sales, and the taxes can be reported over time as you receive payments allowing you to defer tax on capital gains.

But not all asset sales can be reported in installments - inventory or accounts receivable are not eligible for installment accounting - you should pay tax on these items within the year of making the sale, whether you have already received payment or not.

You will find reporting requirements and examples in the IRS publication 537 - http://www.irs.gov/pub/irs-pdf/p537.pdf

 

You do qualify for zero rate for long term capital gain as long as you in 15% tax bracket or below. In 2009 if you are single and your taxable income (after all deductions) is below $33,950 - you will use zero tax rate for long term capital gain.

Please consider this example - your taxable income is $30,000 plus $10,000 long term capital gain. From that capital gain $3,950 will have zero rate - no tax liability, but the rest $6050 will be taxed at 15% - as that part is in 25% tax bracket.

 

Please let me know if any clarification needed.

 

Expert:	LEV
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Answered:	9/20/2009

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