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Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1408
Experience:  JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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Is there a specific IRS Ruling or court case that states that

Customer Question

Is there a specific IRS Ruling or court case that states that an Insurance Agency sale qualifies under the installment sale rules for Capital Gains?
Submitted: 5 years ago.
Category: Tax
Expert:  Jax Tax replied 5 years ago.

Jax Tax : If the business was a corporation and the sale was structured as a stock sale not an asset sale, yes.
Jax Tax : If it does not meet both of the requirements above, you did not sale a business. You sold assets of a business which someone used to start and run their own separate business.

My agency is not a corporation. I am basically trying to find out how to structure the sale so I can pay the capital gains taxes as I receive the payments, not as a lump sum.

Jax Tax and 3 other Tax Specialists are ready to help you
Expert:  Jax Tax replied 5 years ago.
I see. Then what you are doing is considered an asset sale. The sale of business assets are reported on form 4797. The first thing you must do is have a formal apprasial of the assets you are selling. This includes intangible assets like the business name, good will, and client lists. Once done, you have to allocate the full sales price pro rata over the assets you are selling because I doubt the apprasial will male the sales.price to the penny.
Then you have two choices, report the full sales price up front or report the sale as an installment sale. If you choose to treat it as an installment sale, the asset sale is reported over a series of years showing a portion of the asset basis that is reflective of the percent payment received for such asset. You can treat each year's payment as being proratably allocable to all assets sold, or you could apply each year's payment to in full to one or more assets each year up to the value determined by the pro rata allocation of the apprasial amount.
There are special rules for dealing with account receivables especially if you operated on an accrual basis of accounting.
The asset sales are reported using the 4797 but will flow to the business return as they were business assets. What ever form that was being used to report the business income is the form you must use. So sch C, 1065, 1120s etc. Where ever the business reported. If on a 1065 or 1120s, any profit or loss will be passed through the K1 to owners just as it was in the past. Of one sch C, then it stops there.
There will assumingly be interest charged on an installment type sale. This does not go on sch C but sch B even if passed on the K1. The K1 would indicate type of income whether ordinary, interest, or possibly capital if you business held any capital investments that were sold.
It is sometimes beneficial if the sell results in a loss to elect to so the entire sale in one year. If a profit, it may still make sense to report it in one year as you tax rate may be lower than in the future or you may possibly have loss carryovers that can offset it. Also, if you were an LLC or a business filing 1120s returns, you have have positive basis remaining in your ownership that could be classified as capital loss allowing additional offsets of up to $3000 per year against ordinary income or possibly 1244 treatment that would allow up to $50k in ordinary income offset though I doubt this is the case based on the information you just gave me (the 1244 portion that is).
I will wrap this up simply. The asset sales will be ordinary income if the sales price e exceeds your adjusted basis in those assets. If not, it will be.ordinary loss. You can opt to report it all in one year or as an installment sale over the term of repayment. Some assets like AR have special treatment. This is reported on you typical business return not as capital gain on sch C and an appraisial is very important when it comes to allocating the sales price among intangible assets if any. Depending on the very specific circumstances of the assets basis and any capital loss incurred as a result of remaining basis in the business if any, it may be better to report the sale in one year or over several. Specific identification of the allocation of installment payments may allow you losses in the first year or so even if the overall for a gain, nut ultimately increasing the gains in future years. You specific financial circumstances with all other current or expectedr income will determine the best approach. If we are talking about hundreds of thousands of dollars, you need to find a CPA or Attorney that can forecast these options to get the most out of this. If we are talking about a couple thousand, save yourself the trouble and report it all in one year.
What you need to do is easy. Make sure you have a list of the items sold, you have allocated some type of FMV to them around the date of sale for allocation of payments, you have the adjusted cost basis for those assets, you have the repayment terms, you have the actual payment received in each year, you have a full apprasial if any intangibles were sold, you have available you outside basis in the business (if not a sole prop ), you have a copy of you previous year business return, and you go see a professional tax preparer.
If your tax returns suddenly show assets missing that were previously reported on your returns by depreciation, amortization, or expending, your return will be flagged by the IRS for audit. This could lead to other years being audited. You must properly show the disposition of these business assets to prevent this.
Make sure to talk to the preparer about any remaining loans as well, especially if assumed by the buyer as part of the sale.
I can assure you that you will not want to do this yourself.
Here is a link that will link to other publications that will support my statements. In total they are likely thousands or pages that most of which will be very confusing, but if you desire, you can read through them. My advice is to pay someone a few hundred to do it for you. If you have had your returns professionally prepared in the prior year, it will be very easy for that person to report the sales as current software does link to prior years picking up most needed.information.