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I have sold business with the following allocation total…

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Sir I have sold...

Sir I have sold business with the following allocation total =1,180,000 Land 450,000 Building 525,000 FFE =120,000 Goodwill 84,000 Inventory 1,000 I have question regarding the goodwill it was not purchased and is not on the books but is self created my questions is where do I put the amount on part 1 of 4797 or Sch D My company is LLC taxed as partnership

Accountant's Assistant: The Accountant will know how to help. Is there anything else the Accountant should be aware of?

The other question is the placed in date for the self created goodwill,will it be considered short term or long term. I have owned the business for period of 11 years.

Submitted: 5 months ago.Category: Tax
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Customer reply replied 5 months ago
also who the gain be long term or short term. Because I am confused about the placed in service date. I have owned the business for over 10 years. Thanks.
Customer reply replied 5 months ago
since it is self created goodwill, the goodwill was developed over the period of time I have owned the business.
Answered in 8 minutes by:
11/21/2017
Tax Professional: Lev, Tax Advisor replied 5 months ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,717
Experience: Taxes, Immigration, Labor Relations
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Self-created goodwill is classified as non amortizable section 197 intangible.

The capital gain realized from such asset gain is taxed as ordinary gain.
On form 4797 - the sale is reported in Part II.

Let me know if that addressed your concern.

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Customer reply replied 5 months ago
would it not be long term gain and reported on sch d since it is capital asset. Because for example if I had purchased good will and amortized it over years I would pay ordinary income tax on the recaptured again but other gain would be reported as capital gain.
Customer reply replied 5 months ago
I would have reported it on part 3 as section 1245 property.
Customer reply replied 5 months ago
I don't understand how purchased goodwill can have capital gain rates but self created goodwill does not.
Tax Professional: Lev, Tax Advisor replied 5 months ago

Section 1245 property includes tangible personal property that is subject to depreciation, or intangible personal property that is subject to amortization.

AS we mentioned above - Self-created goodwill is classified as non amortizable section 197 intangible.

Therefore it may not be classified as section 1245 property...

.

Correspondingly - only the gain realized from disposition of amortizable section 197 intangible may be treated as long term capital gain.

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Customer reply replied 5 months ago
the other question I had was regarding startup costs that are fully expensed since I sold before the 15 years. Do I report the loss on 4797 part three as section 1245 property on take it as expense deduction on partnership return. Its about 17,000 dollars remaining.
Customer reply replied 5 months ago
I am selling my business, which is primarily a consulting business. The buyer’s tax adviser says that most of the purchase price is goodwill and that we will both report to the IRS that goodwill was sold and purchased. He also says this is good for me because I get capital gain treatment for goodwill. When I asked for some proof that this was right he said that he could not give me proof because I was not his client and I needed to check with my own tax adviser. So I went on line and found IRS Publication 544, which supposedly tells what a capital asset is. I can’t understand it. It has a list of what a capital asset is but goodwill is not in the list. It then has a section on “Section 197 intangibles,” which lists goodwill, but it does not say that goodwill is a capital asset. There is also a section on business assets called “Section 1231 assets,” which includes livestock and timber, but no goodwill. I want a definite answer before I sign documents.A: A sale of goodwill will allow you to report a capital gain. Perhaps the confusion comes from the fact that the tax law itself does not say what a capital asset is, it instead says what it isn’t.A capital asset is anything other than the things the tax law says it is not. Because goodwill is not on the list of non-capital assets, it is then a capital asset.Because your self-created goodwill was not amortizable by you, it is best classified as a capital asset rather than a Section 1231 asset. Both are entitled to favorable capital gain tax rates.
Customer reply replied 5 months ago
this from another website where I read article. Are you 100% sure that it is taxed as ordinary income.
Customer reply replied 5 months ago
INSIGHT ARTICLE | October 07, 2011In IRS Letter Ruling###-##-####1 the IRS ruled that, when a taxpayer could separately identify and distinguish acquired customer-based intangibles from self-created customer-based intangibles, the taxpayer could separately calculate gains on the sale of each, thereby avoiding section 1245 ordinary income recapture on the sale of the self-created customer-based intangibles. The ruling is consistent with a recent Chief Counsel Advice (CCA)2 holding that customer-based intangibles (among others) "can be separately described and valued apart from goodwill" and thus qualify as like-kind property under section 1031. The underlying technical analysis of the ruling, while not groundbreaking, is significant to taxpayers in a variety of transactions outside of section 1245 recapture, such as the application of the section 197 antichurning provisions and the section 1374 built-in gain (BIG) tax.
Tax Professional: Lev, Tax Advisor replied 5 months ago

Regarding section 197 property see here

https://www.law.cornell.edu/uscode/text/26/197

Goodwill is specifically listed as section 197 intangible.

Because section 197 intangibles are capital assets - the goodwill is also a capital asset.

On the other hand - see the same section -

The term “amortizable section 197 intangible” shall not include any section 197 intangible—

(B) which is created by the taxpayer.

I might suggest you provide this reference to the tax adviser.

If needed - I may discuss directly and explain the difference related to self-created assets.

Yes - I am 100% sure.

.

Indeed - the term “capital asset” is defined in the statute - see here

https://www.law.cornell.edu/uscode/text/26/1221

Section 197 assets fit this definition and are treated as capital assets.

.

Startup cost which you amortized is classified as amortizable section 197 intangible and disposition is reported as a sale at zero selling price. Thus not recovered cost will be reported as capital loss on form 4797.

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Customer reply replied 5 months ago
startup costs will be reported in part 1 or part three
Customer reply replied 5 months ago
Sir I have sold business with the following allocation total =1,180,000 Land 450,000 Building 525,000 FFE =120,000 Goodwill 84,000 Inventory 1,000 I have question regarding the goodwill it was not purchased and is not on the books but is self created my questions is where do I put the amount on part1 of 4797 or Sch D My company is LLC taxed as partnership.My questions is I have read lot of articles which say self created goodwill is reported on schedule d and is taxed as long term gain. Other places and previous tax advisor stated that is reported on 4797 in part 2 as short gain and taxed at ordinary gain. My question is why would self created goodwill be taxed at ordinary rates, is because its not capital asset such as building or purchased goodwill? What I am confused about is if I had purchased goodwill from some one at price of 60K and amortized for period of 2 years (4k per year) and resold it for 80k.I would only owe ordinary tax on the 8K and 20k would be capital gain for me. Why would not the same principal work on the self created goodwill since I have not taken any deductions against my ordinary income?
Customer reply replied 5 months ago
How To Handle Proceeds From The Sale Of A Business Attributable To Non-197 Intangibles
When a business, trade, or practice is sold, the treatment of the consideration allocated to the businesses' intangible assets can be a complex matter, especially when a portion of those assets falls outside of Code Sec. 197. This article provides an overview of the key rules for how to handle the tax consequences for non- Code Sec. 197 intangibles.Historical treatment of intangibles. Before the enactment of Code Sec. 197 9, many intangibles, including goodwill and going concern value, were treated as nondepreciable and nonamortizable because they had indeterminate useful lives. (Reg. §1.167(a)-3) These assets would essentially “sit” in the company's books until the company was sold. However, they were generally written off for accounting purposes—appearing to diminish a company's earnings without providing any corresponding tax relief. This led to a good deal of litigation over various taxpayers' attempts to construe goodwill as something that gave rise to deductions and produced a current tax benefit.Similarly, IRS took the position that assets such as customer and subscription lists, insurance expirations, etc., generally had an indeterminate useful life and were therefore nondepreciable. However, these assets were occasionally depreciable in the unusual situation where a customer-based intangible (or portion thereof) didn't possess the characteristics of goodwill, was susceptible to valuation, and was useful to the business for only a limited period of time. (Rev Rul 75-456, 1974-2 CB 65)For other intangibles with determinable lives, including patents and copyrights, a taxpayer could write off its adjusted basis (generally cost) in the intangible for its legal life or, if the taxpayer could prove a shorter period, its useful life. For a covenant not to compete, the cost could generally be amortized over the period of the agreement where the elimination or restraint of competition was for a definite and limited time. However, where the benefits of the restraint or elimination of competition were permanent or for an indefinite duration, no deduction was allowable.Then, in the landmark’93 case of Newark Morning Ledger, 71 AFTR 2d 93-1380, which dealt with an asset called “paid subscribers,” the Supreme Court held that an asset could be depreciated, no matter how closely it resembled goodwill, if the taxpayer could value the asset and establish that it had a useful life. Code Sec. 197 was enacted later in ’93.Background on Code Sec. 197. In response to the conflict between IRS and taxpayers regarding the treatment of goodwill, Congress enacted Code Sec. 197, which allows amortization of goodwill over 15 years. However, Code Sec. 197 also subjects other types of property acquired in connection with the goodwill, which a taxpayer could previously write off over shorter periods of time, to the same 15-year recovery period. For instance, a patent with five years remaining on it is written off over 15 years under Code Sec. 197, but under prior law it could have been written off over five years.In general, an amortizable Code Sec. 197 intangible is an intangible of the type listed in Code Sec. 197(d)(1) acquired after Aug. 10,’93 (or July 25,’91, if the taxpayer made a valid retroactive election) and held in connection with the conduct of a trade or business or a Code Sec. 212 production-of-income activity.Code Sec. 197 intangibles include assets such as goodwill and going concern value; workforce in place; information base; insurance policy expiration; know-how; customer-based intangibles; bank deposit bases; supplier-based intangibles; covenants not to compete; trademarks and trade names; contracts for the use of, and term interests in, other Code Sec. 197 intangibles; and certain similar items. The following are also treated as Code Sec. 197 intangibles if they were acquired in connection with the acquisition of assets constituting a trade or business or a substantial portion thereof: certain types of computer software (in general, software that is not readily available, is subject to an exclusive license, or has been significantly modified for the business); films, sound recordings, video tapes and books; copyrights and patents; and certain rights to receive tangible property or services under a contract granted by the government. The cost of these assets is amortized ratably over a 15-year period.If a business owned intangible assets that it amortized under Code Sec. 197, these assets will be treated as Code Sec. 1231 assets when they are sold as part of the business and will generate Code Sec. 1245 recapture. (Code Sec. 197(f)(7); Code Sec. 1231(b); Code Sec. 1245(a)(2)(A))However, the tax treatment of the part of the sales price allocable to intangible assets that aren't subject to Code Sec. 197 is more complicated. Such assets include:... intangibles (such as goodwill and going concern value) acquire
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