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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
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Experience:  15years with H & R Block. Divisional leader, Instructor
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Hi we are selling a business and dispersing part of money for

Customer Question

Hi we are selling a business and dispersing part of money for persaonal expenses. Is that money taxed as personal income? Or as a capital gains tax?
Submitted: 2 years ago.
Category: Tax
Expert:  Robin D. replied 2 years ago.
Hello and thank you for using Just Answer,
The sale of the business will need to be shown under the business tax filing for the final year. Some of the money received may be ordinary and some may be capital.

A noncapital asset is property that is not a capital asset.The sale of a business usually is not a sale of one asset. Instead, all the assets of the business are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. The following kinds of property are not capital assets.

  1. Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Inventories are discussed in Publication 538, Accounting Periods and Methods. But, see the Tip below.

  2. Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above.

  3. Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Sales of this type of property are discussed in chapter 3.

  4. Real property used in your trade or business or as rental property, even if the property is fully depreciated.

When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. The gain or loss on each asset is figured separately. The sale of capital assets results in capital gain or loss.

Depending on the business entity, the sale may be directly shown on the personal return (Schedule C for a self employed individual).

Customer: replied 2 years ago.


This did not answer my question. The business is actually a block of insurances cases and customers. We are selling future commissions for a lump sum. We have an S corp.


 


We are then transfering 70K to our personal account. How is the 70K taxed? Do we declare it as income?

Expert:  Robin D. replied 2 years ago.

Thank you for adding the additional information, it was most important to answer specifically.

The sale would be capital as the sale of a revenue stream from a customer base. It would be a Long Term capital asset with zero basis, taxed as Long Term Capital Gain as collected. Buyer would capitalize purchase to be amortized over 15 years.

There has been much discussion on this type of asset. As long as the book of business was owned by the business and not by the actual insurance company, like State Farm.

As the S corp owns the property the K1 will show the income that will be carried to the members for their personal returns retaining it's capital property class.

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