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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
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Experience:  10 years experience
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Closing an 1120S... Single shareholder doing an install

Customer Question

For Lane,Closing an 1120S... Single shareholder doing an install agreement over 5 years. I may figure this out while I'm typing.... She's doing group sales for all of the assets and recapturing the depreciation...What is done with the stock basis? I'm afraid this one is over my head to assist with.....
Submitted: 2 months ago.
Category: Tax
Expert:  Lane replied 2 months ago.

Hi. Sorry just broke out of a ... give me a few to prepare the answer ... First thing, to lay the foundation, is that an S-Corp can be sold as an asset sale or as a stock sale ... based on hwat you've said, this is an asset sale.

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Both the buyer and seller will have to complete a Form 8594 "Asset Acquisition Statement Under Section 1060."

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And (as you'll see from the breakdown of how the various asset types are taxed (below) what typically favors the buyer (from a tax perspective) doesn't typically favor the seller ... which is WHY IRS wants the 8594 from both (and of course both must agree).

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But, to answer your question, the stock basis (her basis IN the stock) doesn't change, the assets are being bought FROM the S-Corp. The S-Corp's basis in the assets ends up gong to zero, hsaving been sold, so what she has left is stock in an S-Corp that has no value. (and of course the ramifications of these sales will passthrough to her as the shareholder).

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Here's the breakdown:

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Non-Stock ("asset") Sales

Value placed on Tangible Personal Property (trade fixtures, furniture, equipment):

  • Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
  • Buyer: Establishes basis, depreciate per IRS schedules

Value placed on Leasehold Improvements:

  • Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
  • Buyer: Establishes basis, depreciate per IRS schedules

Value placed on Premise Lease savings (if the lease is at below market rent, it is an intangible asset):

  • Seller: If held for more than one year, is long-term capital gain
  • Buyer: Amortize value over 15 years

Value placed on Covenant Not to Compete (include time and distance of covenant):

  • Seller: Ordinary income as received
  • Buyer: Amortize over 15 years

Value placed on Training/Consultation (include schedule of time, hours, etc.):

  • Seller: Ordinary income as received
  • Buyer: Expense out as paid

Value placed on Registered Vehicles (do not include in Tangible Personal Property above):

  • Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
  • Buyer: Establishes basis, depreciate per IRS schedules

Value placed on Liquor License (include license type and number; is an intangible asset):

  • Seller: If held for more than one year, is long-term capital gain
  • Buyer: Amortize over 15 years

Value placed on Customer List:

  • Seller: Ordinary income as received
  • Buyer: Amortize over 15 years

Value placed on Goodwill:

  • Seller: If held for more than one year, is long-term capital gain
  • Buyer: Amortize over 15 years

Value placed on Buildings:

  • Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
  • Buyer: Establishes basis, depreciate per IRS schedules

Value placed on Land:

  • Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
  • Buyer: No immediate tax impacts

Value placed on Inventory:

  • Seller: Ordinary income, to the extent that it is over basis
  • Buyer: Treated as "cost of goods sold" upon sale of products

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