Tax

Have a tax question? Ask a tax Expert

Ask an Expert,
Get an Answer ASAP!

Client sold his business. Sale price exceeded basis in

Customer Question
assets being sold. There is...
Client sold his business. Sale price exceeded basis in assets being sold. There is a note on the business that will not be sold and is the responsibility of the seller. How does this figure into the computation of gain/(loss) on sale of the business. Additionally,
seller took back a note so can this be an installment sale. Finally, what are basis loss carryovers. The prior accountant had these on the return with no backup and I haven't heard of it before
Submitted: 2 years ago.Category: Tax
Show More
Show Less
Ask Your Own Tax Question
Answered in 6 minutes by:
6/22/2015
Tax Professional: Lev, Tax Advisor replied 2 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,857
Experience: Taxes, Immigration, Labor Relations
Verified
Hi and welcome to our site!.The note which is a part of the business and that is NOT sold - will not have any effect of the the computation of gain/(loss) on sold assets."basis loss carryovers" - there is no such term - so we need to verify the exact meaning.The basis is actual investment into a particular asset with following adjustments.There is no gain or loss unless the asset is sold - that is regardless if the asset value increased or decreased.Depending on the type of the asset - there might be accumulated depreciation which might be recaptured upon the sale.
Ask Your Own Tax Question
Customer reply replied 2 years ago
Is this transaction subject to ordinary income or capital gains tax. They sold the business which was comprised of fixed assets that had largely been depreciated. Also, since the note calls for monthly payments of $3,000 does this qualify as an installment sale. I am having trouble with my tax software which is considering this ordinary income.I am glad to hear there is no so term as "basis loss carry overs". At this point I thought I had heard of most everything but never that.
Tax Professional: Lev, Tax Advisor replied 2 years ago
The sale of a business usually is not a sale of one asset. Instead, all the assets of the business are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss.When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as 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 gain or loss from a section 1231 transaction. The sale of inventory results in ordinary income or loss.Liabilities assumed by the purchaser is treated as cash payment.Generally, both the purchaser and seller must file Form 8594 and attach it to their income tax returns when there is a transfer of a group of assets that make up a trade or business and the purchaser's basis in such assets is determined wholly by the amount paid for the assets.So - we need to start with a list of assets - and will need to assigned a sale price to each asset - as agreed between parties.Then - we will determine the gain or loss on each asset separately and separately will determine how that gain or loss is treated.
Ask Your Own Tax Question
Tax Professional: Lev, Tax Advisor replied 2 years ago
Some gain might be treated as capital gain - and some as ordinary income - that is separately determined for each asset.Installment payment is a separate issue - that is related to when income is recognized - but is not related to how gain or loss is calculated.
Ask Your Own Tax Question
Customer reply replied 2 years ago
I have a list of assets, date of acquisition, cost, and accumulated depreciation. All of the assets are production equipment with the exception of small amounts for a non-compete and goodwill.
Tax Professional: Lev, Tax Advisor replied 2 years ago
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.www.irs.gov/pub/irs.../f8594_accessible.pdfCorrespondingly - we need to use the basis of each asset separately.So - you will need to start with the list of assets, basis for each asset - and assigned selling price from 8594.
Ask Your Own Tax Question
Tax Professional: Lev, Tax Advisor replied 2 years ago
The gain on depreciable production equipment held more than a year is classified as section 1231 gain and is taxed as long term capital gain.Depreciation recaptured - is taxed as ordinary income (but the tax rate is not more than 225%)Non-compete agreement and goodwill are generally treated as self-created intangibles - and the gain of these is taxed as ordinary income.
Ask Your Own Tax Question
Customer reply replied 2 years ago
I just attached a file I used to allocate the sales price to the equipment and also lists the cost and accumulated depreciation
Tax Professional: Lev, Tax Advisor replied 2 years ago
Great! That is a very good start.How - we need to calculate the gain and the amount of depreciation recapture separately for each asset.
Ask Your Own Tax Question
Customer reply replied 2 years ago
So the depreciation recapture is ordinary income and the difference between the adjusted basis and the sales tax is a capital loss?
Tax Professional: Lev, Tax Advisor replied 2 years ago
Use form 4797 to report the sale for each asset.When the sale price is less than the adjusted basis - there is loss - and that woudl be section 1231 loss - reported as ordinary loss - and there woudl not be any depreciation recapture for THAT asset.If there is a gain - a part of that gain woudl be allocated to the depreciation recapture. Again - all calculations are done on form 4797. Another part woudl be a section 1231 gain - which is taxed as long term capital gain.
Ask Your Own Tax Question
Tax Professional: Lev, Tax Advisor replied 2 years ago
And finally - as you are selling business assets 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 than bank-financed sales, 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 - http://www.irs.gov/pub/irs-pdf/p537.pdf
.
Use Form 6252 , Installment Sale Income, to report an installment sale in the year the sale occurs and for each year you receive an installment payment.
http://www.irs.gov/pub/irs-pdf/f6252.pdf
.
You report interest on an installment sale as ordinary income in the same manner as any other interest income. If the installment sales contract does not provide for adequate stated interest, part of the stated principal may be recharacterized as "imputed" interest or as interest under the original issue discount rules, even if you have a loss. You must use the applicable federal rate (AFR) to figure the unstated interest on the sale.
Ask Your Own Tax Question
Customer reply replied 2 years ago
I have attached a copy of the form 4797 and the disposition detail for each asset. It is reporting on the tax return as a $251,113 ordinary income from form 4797. It is also reporting installment sale income of $11,128 on form 6252 and net section 1231 gain of $3,848
Tax Professional: Lev, Tax Advisor replied 2 years ago
... question...
Was that business previously purchased?
-- Did the seller actually deducted amortization of the goodwill and non-completer agreement? - see column (e)
I was under impression - these are self-created intangibles - and there were no amortization...
For assets - the full gain is allocated to depreciation recapture - so - there is no capital gain on these assets.
Ask Your Own Tax Question
Customer reply replied 2 years ago
The business was purchased in 2010 and sold in 2014. The purchase created the $20,000 of intangibles. So this is all ordinary income as a result of the recapture. Wouldn't that income be only partially recognized as a result of the installment sale?
Tax Professional: Lev, Tax Advisor replied 2 years ago
If the business was purchased as assets - and there were intangible assets included which were amortized - then - you are correct - these are section 197 amortizable intangibles - and the gain (above amortization recapture) woudl be section 1231 gain.
Regarding installment sale... You may choose either to recognize the FULL income in the year or sale OR
to use an installment reporting method.
Generally - you are required to use an installment method unless you specifically select to include the full gain.
Ask Your Own Tax Question
Was this answer helpful?
Ask Lev Your Own Question
Lev
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,857
32,857 Satisfied Customers
Experience: Taxes, Immigration, Labor Relations

Lev is online now

A new question is answered every 9 seconds

How JustAnswer works:

  • Ask an ExpertExperts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional AnswerVia email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction GuaranteeRate the answer you receive.

JustAnswer in the News:

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

What Customers are Saying:

I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response...

T.G.WMatteson, IL

I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight.

BonnieChesnee, SC

Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation.

JohnMinneapolis, MN

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with.

OrvilleHesperia, California

Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help.

Mary C.Freshfield, Liverpool, UK

This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!!

AlexLos Angeles, CA

Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult.

GPHesperia, CA

< Previous | Next >

Meet the Experts:

Wallstreet Esq.

Wallstreet Esq.

Tax Attorney

586 satisfied customers

10 years experience

Mark D

Mark D

Enrolled Agent

1,338 satisfied customers

MBA, EA, Specializing in Business and Individual Tax Returns and Issues

Richard

Richard

Tax Attorney

4,495 satisfied customers

29 years of experience as a tax, real estate, and business attorney.

PhillipsEsq.

PhillipsEsq.

Attorney-at-Law

59 satisfied customers

B.A., M.B.A, J.D.

Robin D.

Robin D.

Senior Tax Advisor 4

15,272 satisfied customers

15years with H & R Block. Divisional leader, Instructor

Megan C

Megan C

Certified Public Accountant (CPA)

8,655 satisfied customers

Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

jgordosea

jgordosea

Enrolled Agent

2,885 satisfied customers

I've prepared all types of taxes since 1987.

< Previous | Next >

Related Tax Questions
Are installment sales of rental real estate sales allowed in
Are installment sales of rental real estate sales allowed in PA or does the entire gain have to be reported on the pA-40 return in the year of sale, regardless of whether the payments are being made i… read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
2,232 satisfied customers
What is my capital gains tax liability on commercial
what is my capital gains tax liability on commercial property inherited in 1991. assessed value at the time of inheritance was $171,000. Selling price would be $850,000; $200,000 at time of sale - bal… read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
2,232 satisfied customers
What is the 2018 Federal capital gains tax rate for married
What is the 2018 Federal capital gains tax rate for married filing jointly with combined incomes of <$325K? Also, same question for California. We are selling our home and expect a capital gain of … read more
Barbara
Barbara
Enrolled Agent, Paralegal
5,119 satisfied customers
28 form 1040A, "tax" - includes FICA and federal income? Or
https://ttlc.intuit.comline 28 form 1040A, "tax" - includes FICA and federal income? Or just federal income? … read more
Barbara
Barbara
Enrolled Agent, Paralegal
5,119 satisfied customers
I am working on the Form 6252, Installment sale Income. My
I am working on the Form 6252 , Installment sale Income. My client Sold in 2016 her business and on the 2016 she received her first payment and the final payment is 2017 for whom i am doing the tax re… read more
Dr Arthur Rubin
Dr Arthur Rubin
Doctoral Degree
24 satisfied customers
I am completing my moms federal income tax forms for 2017.
I am completing my moms federal income tax forms for 2017. Mom (who is 90) purchased a vacant lot in June of 2012 and sold it at a profit of $23,7550 in November of 2017. Moms adjusted gross income fo… read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
2,232 satisfied customers
I need some help for a client with installment sale of some
I need some help for a client with installment sale of some land that was recently foreclosed on and taken back by the seller. … read more
PDtax
PDtax
Owner
Master\u0027s Degree
1 satisfied customers
According to federal income taxes rules, can a non-
According to federal income taxes rules, can a non- custodial parent fund a bank account with pre-tax dollars to pay child support … read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
15,272 satisfied customers
How do I report income from sale of business interest which
How do I report income from sale of business interest which was classified as good will? I received a lump sum and will receive monthly payments for 5 years … read more
Lev
Lev
Tax Advisor
32,857 satisfied customers
Does 1250 depreciation recapture rules apply if a property
Does 1250 depreciation recapture rules apply if a property is sold at a loss AND depreciation was not taken on the property. The difference between the adjusted basis (had depreciation been taken) and… read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
I have a question about -term capital gain tax rate for 2018
I have a question about long-term capital gain tax rate for 2018 for an investment property … read more
Barbara
Barbara
Enrolled Agent, Paralegal
5,119 satisfied customers
I have a question about term capital gain tax rate for 2018.
I have a question about long term capital gain tax rate for 2018. I bought a commercial property under my name and held on to it for 4 years. I sold it in January 2018. I filed my income tax return fo… read more
Barbara
Barbara
Enrolled Agent, Paralegal
5,119 satisfied customers
Iowa Income Tax. Is 100% of capital gains on the sale of a
Iowa Income Tax. Is 100% of capital gains on the sale of a rental property deductible if the requirement is met for hours spent for management of the property? … read more
Barbara
Barbara
Enrolled Agent, Paralegal
5,119 satisfied customers
What is the tax rate of capital gain when I sell the rental
What is the tax rate of capital gain when I sell the rental property in the regular yearly income tax bracket of 10-15%? … read more
Carter McBride
Carter McBride
LLM
1,069 satisfied customers
What would the rate of capital gains tax on income property
what would the rate of capital gains tax on income property held for 25 years by an owner who of late had and will have income of less than20,oooIt is also my understanding we (my brother and I) are e… read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
15,272 satisfied customers
Installment Sale vs Mortgage Taxpayer owns a piece of real
Installment Sale vs Mortgage Taxpayer owns a piece of real estate and plans to sell to a non-related individual. Taxpayer will hold the note on the sale. Does that automatically make it an installment… read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
2,232 satisfied customers
Installment Sales / Rent to own A taxpayer has several
Installment Sales / Rent to own A taxpayer has several rental properties. 1. A couple properties are listed on their tax return as an installment sale and are being handled properly, recording interes… read more
abci168
abci168
Principal
27 satisfied customers
I sold the business assets in an installment sale. Proceeds
I sold the business assets in an installment sale. Proceeds were: … read more
PDtax
PDtax
Owner
Master\u0027s Degree
1 satisfied customers
Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Show MoreShow Less

Ask Your Question

x