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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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I have a tax question relating to a SMLLC. What is the tax

Customer Question

I have a tax question relating to a SMLLC.
What is the tax effect of the 100% purchase of a SMLLC when the purchase price is less than the assets of that SMLLC?
A simple example....Net property plant and equipment = $15,000,000, Trademarks $5,000,000. Liabilities assumed of $2,000,000.
Purchase price of $10,000,000.
This enty is out of balance by 8,000,000. Is this a gain? should there be a write down of the difference? Is it deductible?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
Hi and welcome to our site!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.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. The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction. The sale of inventory results in ordinary income or loss.Liabilities assumed by the purchaser is treated as cash payment.
Expert:  Lev replied 1 year ago.
Generally, both the purchaser and seller must file Form 8594 and attach it to their income tax returns when there is a transfer of a group of assets that make up a trade or business and the purchaser's basis in such assets is determined wholly by the amount paid for the assets.In your case - the selling price is $12,000,000 - cash plus assumed liability - and must be allocated between all assets.losses on section 1231 transactions are fully deductible.Let me know if you need any help with reporting.
Customer: replied 1 year ago.
I am looking at this from the perspective of the buyer, who purchased the SMLLC member interest. Because a SMLLC is disregarded as a separate entity for Federal purposes, is this essentially an asset purchase? or? And does your answer change if this was a member interest that was purchased?
Expert:  Lev replied 1 year ago.
Yes - if that is not a corporation - that is the asset sale.
As the single member LLC is a disregarded entity - for income tax purposes - the sale of assets is reported on owner's tax return.
The buyer will purchase assets - and will start depreciation based on agreed purchase prices - as per form 8594.
As long as that is a disregarded entity - the member interest is not treated as a separate asset.
If the buyer is a single member - the same treatment will continue.
But if there are several buyers - the LLC will be a partnership - and the partnership will be treated as a buyer.
Regardless - assets will be started a new depreciation schedule based on agreed purchase prices.
Customer: replied 1 year ago.
Sorry to make you work extra hard on this, but to be clear:
Seller deducts loss on asset write-down and buyer starts new asset depreciation schedule using $12,000,000 as the asset base?Yes, the SMLLC is a schedule C reporting for the buyer, no corporate treatment.
Expert:  Lev replied 1 year ago.
Yes - correct that $12,000,000 will be a starting depreciation basis.
However - it should be allocated among all assets - exactly the same way as agreed between the seller and the buyer.
That allocation is reported on form 8594 and both the purchaser and seller must attach it to their income tax returns.
Each asset is depreciated separately.
Similarly - the seller - will reported and determine the gain or loss and possible depreciation recapture separately for each asset. But should use same selling prices as agrees with the buyer.
Customer: replied 1 year ago.
I understand the 8594, I have done those before, but the crux of the treatment on the purchase of a member interest of a SMLLC was confusing. My client thinks he is entitled to the write down of the asset base, not the seller, Thanks.
Expert:  Lev replied 1 year ago.
That would not be correct interpretation...
When capital assets are purchased - they should be depreciated.
Some assets might be eligible for section 179 - and the full purchase price could be deducted in the year of purchase - assuming other requirements are met.
But otherwise the purchase price may not be written off...
The seller - simply reports the sale transaction - separately for each asset - and calculate the gain as (selling price) MINUS (seller's basis)
The seller and the buyer should agree of the sale price allocation - but each will have separate reporting requirements - and that is not a matter of negotiation.

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