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RD
RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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I have a small net loss on my small business this year. I

Customer Question

I have a small net loss on my small business this year. I am selling the business for $20k. I have paid $80k. The market value is abut $125k. So I have a loss. How is this reported on my income tax? Is the loss on selling the business a capital loss, for which we can only take $3k per year? I have no other capital gains. I am married filing jointly and i am 50, my husband is 46.
Submitted: 5 years ago.
Category: Tax
Expert:  RD replied 5 years ago.

Did you buy the business for $80K?

 

Are you selling the business assets? How is the sale structured?

Did you depreciate or amortize any of the business purchase cost?

Customer: replied 5 years ago.
We paid $80k. The equipment is leased and the new owner will take over the lease. So the sale includes some inventory and small equipment. Furniture etc. We have depreciated/amortized over 5 years. I'm not sure how much that is.
Expert:  RD replied 5 years ago.

Normally when you sell the business you need to allocate the sale proceeds to the various assets sold.

 

For depreciated assets you need to determine the adjusted cost basis of the assets (which is the cost minus depreciation claimed). Your gain or loss is sales price allocated to assets minus the adjusted cost basis. Normally if the assets are fully depreciated than this would result in a gain.

 

Inventory sale will be reported and the purchase cost of the inventory will be reported. so the net amount would be a profit or loss depending on the case.

 

Any sale amount allocated to goodwill will be taxable as a long term capital gain. If you bought the business and paid for goodwill than you must have amortized the same over a period of time and hence you will have to determine the adjusted basis of goodwill to determine the gain or loss.

 

Normally gain on sale of depreciable assets is taxed as ordinary income to the extent of depreciation claimed. Balance gain is taxed as long term capital gain.

 

Here is a link with detailed information-

http://www.irs.gov/businesses/small/article/0,,id=98692,00.html

 

http://www.irs.gov/businesses/small/article/0,,id=98703,00.html

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

 

Customer: replied 5 years ago.

Sorry, I don't understand your reply. I don't understand the link you sent me to either.

 

Even with depreciation my business is selling at a loss. Is the loss considered a capital loss? Say the equipment is valued at $15k and has been fully depreciated. I have very little inventory, maybe $1,000. I paid $80k for the business. I am selling it for $20, but won't receive any cash since the buyer is making payments to us monthly starting next year.

 

What I want to know is will I be reporting a loss for the business, or do I have a capital loss that the IRS only allows $3k per year?

Expert:  RD replied 5 years ago.

First of all, generally the loss on sale of business is not a capital loss. The loss is ordinary and allowed against your other income.

 

Even if you paid $80K for the business purchase - equipments etc....you have depreciated those assets over a period of time. So you cost basis is reduced from $80K by the depreciation amounts that you have claimed.

Hence you need to determine the adjusted cost basis of the assets, allocate the sale price to these assets and then determine the gain or loss.

 

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

 

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CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..