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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29558
Experience:  Taxes, Immigration, Labor Relations
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Client sold his business. Sale price exceeded basis in

Customer Question

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
Expert:  Lev replied 2 years ago.
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.
Customer: 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.
Expert:  Lev 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.
Expert:  Lev 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.
Customer: 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.
Expert:  Lev 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 - 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.
Expert:  Lev 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.
Customer: 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
Expert:  Lev 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.
Customer: 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?
Expert:  Lev 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.
Expert:  Lev 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 -
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.
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.
Customer: 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
Expert:  Lev 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.
Customer: 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?
Expert:  Lev 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.