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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I started a business 10 years ago with $50,000. i am about

Customer Question

i started a business 10 years ago with $50,000. i am about to sell it now for $400,000, which includes $200,000 of inventory. what will be the amount of capital gains tax?
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

The tax liability is calculated differently depending if that is a stock sale - means you are selling shares of corporation OR

that is an asset sale - means you are selling business assets.

Can you clarify?

Customer: replied 11 months ago.
asset sale. I will sale the entire business. My initial investment to start the business was 50K and I made the business grow over the years. My current inventory is valued at $200,000 at cost.
Expert:  Lev replied 11 months ago.

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 (or a group of similar assets) 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.

The sale of self-created intangible assets is taxed as ordinary income.

Liabilities assumed by the purchaser is treated as cash payment.

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.

So - we need to start with a list of assets - and will need to assigned a sale price to each asset - as agreed between parties.

Then - we will determine the gain or loss on each asset separately and separately will determine how that gain or loss is treated.

To calculate the gain separate ly for each asset - we should take (assumed sale price) MINUS (adjusted basis) = gain

For instance for physical inventory - we need to use the original purchase price.

Here is the form to use

http://www.irs.gov/pub/irs-pdf/f8594.pdf

If you briefly describe assets, their selling prices and basis - we may verify the gain and how that gain is taxed.

Customer: replied 11 months ago.
$200,000 inventory ( about 5000 different items ) is 100% all beauty supply products, which i have purchased from my vendor. Total furniture and store fixture is about $20,000. Busniess sale price is $400,000. I calculated my capital gains on $180.000. This is how i calculated ( $400,000 minus 50K ( original inventment) minus $200 K inventory minus $20,000 fixture . please confirm if my calculation is correct
Expert:  Lev replied 11 months ago.

You need to calculate a gain SEPARATELY for each asset.

- furniture $20k (selling price) MINUS ? (adjusted basis) = ?
inventory ? (selling price) MINUS $200k (cost basis) = ?

etc...

separately for EACH asset.

Expert:  Lev replied 11 months ago.

Correspondingly - you will determine the tax treatment - capital gain or ordinary income separately for each asset as well.

For instance

- gain or loss on sale of inventory - is ordinary gain or loss.

- gain or loss on sale of furniture and store fixture is capital gain or loss, but a part of the gain attributable to depreciation recapture is taxed as ordinary income

- the gain of self-created intangibles - such as goodwill, customer list, etc - is ordinary income.

etc.

Any questions?

Expert:  Lev replied 11 months ago.

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If you still have any doubts, need clarification - please be sure to ask.
I am here to help you will all tax related issues.