Hi Community,

I have a client who ran an early learning center, Schedule C, that she just sold - using two installment agreements. The first is for the real estate. The second is for the "business" - includes the classroom supplies but is mostly intangible - her clientele, and a noncompete. My client retained her trade name and her LLC, her business checking account, and the buyer is operating the business as an extension of their pre-existing business.

My question is - for the second, smaller installment agreement - I don't think that my client has any basis. Any tangible assets included in this were expensed - the only assets placed in service were as they pertained to the real estate, which has its own note. Once I have the books reconciled up to the date of sale, she may have some capital in the LLC (or may not) but even in that case I don't see that this would constitute cost basis - what she sold were supplies/equipment that were expensed, and the intangible clientele and noncompete - no basis.

This is concerning for 2024, because although the ongoing income from the second note will be smaller, on that installment note she received a $70K downpayment. I'm thinking that is straight income, no cost basis, and taxed at ordinary income rates. Before I make that judgement call, I am doing my research and wanted any input that another practitioner may have. Thanks!