Thank you. ***** better understand. Yes, it can be treated as a capital gain. The problem is that you have been expensing the cost associated with the development of the process. This would mean that you would get a capital gain and an ordinary deduction
. The best of both worlds (but not the correct way). This is why your CPA wants to go back and capitalize costs associated with the process. The reason why I was asking for a ballpark of the cost the sale is that the IRS
has different division. Companies with assets greater than 10 million are handled by Large Business and International and smaller entities would be handled by Small Business Self Employed. If you are just over 10 million it may work in your favor as you are a small fish. The problem with treating it as a capital asset is that there is no asset on the books. So on the tax return it looks like there is not basis in the IP. This is another reason to capitalize the amounts in the prior year. Is it possible to capitalize the cost in the year of the sale? This may result in reducing some of your operating costs for the year. But you would avoid the need to amend the prior year returns. With this approach you are still paying taxes on the amount you capitalized but you would potentially avoid interest
and penalties associated with amending prior returns. You could use the argument that the administrative burden
to amend prior S-Corporation returns, prior shareholder
returns was too great. You would wind up with the same answer, and same taxes paid assuming that you are in the same tax bracket. I do not think that there is a great deal of exposure taking this position. Again, no tax would be avoid - just interest and penalties, and the cost to prepare
amended returns. Does that make sense?