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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29650
Experience:  Taxes, Immigration, Labor Relations
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I have sold my business and we were operating as an S Corporation.

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I have sold my business and we were operating as an S Corporation. Most of the assets in the business have been fully depreciated, so I am guessing that I will have to pay taxes on the gain. My question is: I have a great deal of Additional Paid in Capital on my balance sheet. My guess is that I will have a profit on the sale of the corporation assets of approximately $275,000. I have paid in capital of over $500,000. How do I account for the paid in capital on my corporate tax return? It would be nice if there is someway to offset the gain in sale of assets with my capital. Is that possible?

Lev :

Hi and welcome to Just Answer!
The main question - did you sold your S-corporation itself - means stock sale?
Or S-corporation was dissolved?
Or you still keep your S-corporation and business assets are sold by your S-corporation - not by you?
There will be different treatment for tax purposes.

Lev :

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.
The gain or loss should be determined separately for each asset. 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.

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 - is taxed as ordinary income.

Lev :

Since business assets were owned and were sold by S-corporation - which is a separate entity - the sale transaction is reported on the S-corporation's income tax return and gains or losses are S-corporation's losses.
However - because S-corporation is a pass through entity which doesn't pay income taxes - losses are passes through to you as a shareholder. Generally - that done on schedule K1 - gains and losses are reported on your tax return - schedule E which is attached to your form 1040.
If you decide to dissolve the S-corporation - and all assets (cash and non cash assets) are distributed to shareholder - that is treated as if shares are sold - and you recognize the loss on liquidation. In this case - S-corporation will file a final tax return - and will report liquidation distribution to shareholders on form 1099DIV -‎ - see boxes 8 and 9.
On your tax return - you will report as if shares were sold and your loss will be (liquidation distribution you received at dissolution) MINUS (adjusted basis you have in S-corporation shares).

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