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jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3161
Experience:  I've prepared all types of taxes since 1987.
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Late last year I closed a small construction business that

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Late last year I closed a small construction business that rarely made any net profit. In the end, I was able to sell off just enough assets to pay off my bank loans, but am still paying off vendors out of my pocket. I now am trying to file my taxes (finally) and am showing a net income of 150k on the sale of the assets, but I never received any of that money - it just went straight to loan pay-offs. The only thing in my P&L that would help offset this liability is bad debt - which there is plenty of, but I am told that companies not working on an accrual basis cannot write of bad debt. In the end, I have no way to come up with the money that the IRS says I owe, so I don't know what to do.   Do you have any ideas??
Submitted: 8 years ago.
Category: Tax
Expert:  jgordosea replied 8 years ago.



What form of organization was the business - sole proprietor, corporation, partnership ?


If a corporation was an S election made?


Did you subtract the cost,( that is the purchase price plus costs of buying less any depreciation) of the assets from the sales price (less selling expenses) to get to the gain ?


Does it seem right that the assets were sold for 150K more than you paid for them?


These answers will help us give a correct answer. Thank you.





Customer: replied 8 years ago.


The company is an LLC


The assets and good will of the original purchase of the company amounted to $425k, we sold a portion of the company in 2002 for $175k, and the remaining equuipment and good will have been fully depreciated. The assets we sold were $115k worth of equipment and $35k for client list and contracts. So we sold for $100k less than we paid, but reported depreciation during ownership - would have to see what that total is.


It is not correct that we sold the assets for $150k more than we paid for them, but we did depreciate the assets.


Any help is appreciated.

Expert:  jgordosea replied 8 years ago.

Hello again,


Your gain should roughly be the sales price less the purchase price less any depreciation taken (not including the costs of buying or selling)


If you paid 425K total and you got 175K + 115K +35K or 325K total then the only way you would end with 150K of gain would be if you took 250K of depreciation.


That could be possible if you held the assets for most of their useful life or if you used section 179 expensing to take the depreciation deduction in the year the asset was placed into service.


An LLC can be taxed as a sole proprietorship, partnership, corporation or S corporation. If you have been getting a Schedule K-1 from the LLC then you have likely included the depreciation to reduce your gain in prior years or even to pass through losses to you. Likewise as a sole proprietor you wold already have taken the benefit of the depreciation deduction.

In that case you are correct that there is not any cash realized on the sale of assets encumbered with debt but you do have to include the gain in your income when you dispose assets for which you took an earlier deduction.


It is not clear why you said "I have no way to come up with the money that the IRS says I owe.." You do need to be sure that the returns are (or have been) prepared to get the least legal tax liability and then proceed from there to consider Payment Plans, Installment Agreements if you are unable to pay the tax in full at this time or perhaps even an Offer in Compromise (usually only best if you do not have significant assets as compare to the amount of tax liability)


The Internal Revenue Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement.


I hope this helps to clarify for you.


Best wishes.








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