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Sold a business this year. Trying to figure out what the cap

Sold a business this year...
Sold a business this year. Trying to figure out what the cap gains taxes we should be expecting. We sold it for $495k but only received net $66k cash. The balance is due over time. If we are to pay on the full amount, we are considering selling the note. I also own a small finance company which buys notes from various sources. If I sell this note to my other company at a large discount would this lower my phantom tax (tax on sales but no cash received). What are my options? Thanks!
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Answered in 12 minutes by:
10/30/2013
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,150
Experience: Taxes, Immigration, Labor Relations
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Lev :

Hi and welcome to our site!
If you sold your business on installment - you might be eligible to use installment method to report your income. So - you will avoid tax liability on that "phantom income"
The note is considered an asset - and if you will sell the note and recognize the loss - that loss is deductible. However if sold to a related party - as to another company which you own - the loss may not be used to offset your other income.
Also - you need to be clear if sold your business as assets sale - in this case - not all proceeds might be taxed as a capital gain.

Customer:

it is an asset sale

Customer:

but there were no assets worth mentioning

Customer:

a few supplies, and a truck

Customer:

but nothing close to the sale amount

Lev :

Still you need to assign the sale price to specific assets - do you have a list if items you actually sold?

Customer:

yes

Customer:

so what do we do with the balance?

Customer:

that is the installment method

Lev :

the balance would be considered a self-created intangible goodwill - and will be taxed as a regular income - not as a capital gain.

Customer:

wow...why not cap gains?

Customer:

i was under the impression that a business sale is cap gains

Lev :

Self-created intangibles are not taxes as a capital gain.

Customer:

so what about things like customer accounts...are those intangible good will or an asset??

Customer:

we had customer contracts that had years of service left

Lev :

These are also intangibles - and also self-created - if were created during your normal business operations and not purchased.

Customer:

ic

Lev :

Similar - not compete agreement if you have any - you need a full list of items you actually sold as your business assets.

Customer:

meaning that non-compete is not something sold but something intangible, right?

Customer:

so if i bought a business and sold that business it would be Cap Gains...but since i created this it is intangible and thus ordinary income??

Customer:

or am i missing something

Lev :

Here is a brief description of aspects to consider when you are selling business assets - http://www.irs.gov/pub/irs-utl/33_-_sale_of_business_assets_-_taking_the_mystery_out_of_form_4797.pdf

Lev :

Yes - normally - when you are selling the business the part of your selling contract is an agreement which prevent you from competing with the buyer. And that agreement has a value and is considered a non-tangible asset.

Customer:

ok

Customer:

ty for the info

Lev
Lev, Tax Advisor
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Some additional information you might find helpful...

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.
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Lev
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