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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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We recently sold our payroll practice to ADP and want to

Customer Question

Customer: hello my name is ***** ***** recently sold our payroll practice to ADP and want to properly record the transaction for reporting and tax purposes
JA: Thanks. Can you give me any more details about your issue?
Customer: we are a full service CPA firm and sold our payroll to ADP so now we need to record that on the books, from my research it looks like it's a capital gain it was a self created business that we sold
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Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

The sale of self-created section 197 intangibles are reported on form 4797 - as sale of business assets.
You will need it to add to your books with zero basis - and total sale price would be your gain.

That gain will be taxed as ordinary income - not as long term capital gain.

Only amortizable section 197 intangibles qualify for long term capital gain tax treatments.

Any questions?

Customer: replied 11 months ago.
Why zero basis? I was reading that I need to create a separate balance sheet for this side of the business and value the net worth and the difference between the sale price and the net worth (plus/minus legal fees) will be my gain to be taxed
Expert:  Lev replied 11 months ago.

We may not just make-up the basis of the asset from its "net worth"...

The basis is the actual cost which is capitalized.

I doubt that you capitalized any expenses related to that asset - otherwise you would already have it on the balance sheet.

When the asset was created during actual business activities and all related expenses were deducted - the basis is zero.

Customer: replied 11 months ago.
no we haven't capitalized anything and we don't have anything on our books for this. We are receiving the proceeds in installment, some we received end of 2015 and the rest we'll get in 2016. the tax treatment as ordinary income should be when we receive it(earn it), right?
Expert:  Lev replied 11 months ago.

For installment sale - you generally using installment reporting method - but you may opt out and report the total income as received in the year of the sale.

You will find reporting requirements and examples in the IRS publication 537 -

http://www.irs.gov/pub/irs-pdf/p537.pdf

.Use Form 6252 , Installment Sale Income, to report an installment sale in the year the sale occurs and for each year you receive an installment payment.

http://www.irs.gov/pub/irs-pdf/f6252.pdf

Expert:  Lev replied 11 months ago.

.

You report interest on an installment sale as ordinary income in the same manner as any other interest income. If the installment sales contract does not provide for adequate stated interest, part of the stated principal may be recharacterized as imputed interest or as interest under the original issue discount rules, even if you have a loss.

You must use the applicable federal rate (AFR) to figure the unstated interest on the sale.