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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29574
Experience:  Taxes, Immigration, Labor Relations
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I just sold a small business in installment over eight years. Do

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I just sold a small business in installment over eight years.
Do I have to pay the capital gain tax all in this year or spread over eight years?

Lev :

Hi and welcome to Just Answer!

If the business is sold as assets - the business is a collection of assets, some tangible (real estate, inventory, etc) and some intangible (goodwill, accounts receivable, a trade name, etc). According to IRS rules, the buyer and seller must use the same allocation, so the allocation will have to be negotiated and put in writing as part of the sales contract.

Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred.
Seller's taxable income is calculated for each asset = (selling price) - (basis); If the asset was purchased - the basis is its purchase price; The basis should be adjusted by any improvement expenses and depreciation.

Lev :

When sold, these assets must be classified as capital assets, depreciable property, real property, intangible property (including goodwill, non-compete agreement, patents, franchise, trademark, trade name), or property held for sale (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 long term gain or ordinary loss. The sale of inventory results in ordinary income or loss.The sale of real property or depreciable property used in the business and held longer than 1 year results in long term gain or ordinary loss.

Self-created assets generally do not qualify for long term capital gain treatment.
When you determine the gain on depreciable asset - part of the gain attributable to depreciation recapture is taxed as ordinary income and the rest of the gain - as a long term capital gain. Self-created intangibles - such as goodwill - are taxed as ordinary income.

Lev :

Because you are selling your business using installments - the buyer will typically pay a down payment, and then the seller finance the rest so that the buyer will pay in installments over a period of time, determined in the sales agreement plus an interest.
The main benefits to installment sales is that this will generally bring a higher price, and the taxes can be reported over time as you receive payments allowing you to defer tax on capital gains. But not all asset sales can be reported in installments - inventory or accounts receivable are not eligible for installment accounting - you should pay tax on these items within the year of making the sale, whether you have already received payment or not.
You will find reporting requirements and examples in the IRS publication 537 -

Lev :

So - you report the sale of your business assets in the year of the sale.
Some assets (but not all!) might be eligible for to defer recognition of the taxable gain to years when payments will be received.
In additional - you will have interest income on installment sale.

Lev :

Sorry if you expected differently.
Please let me know if you need any clarification.

Lev and other Tax Specialists are ready to help you