I had a client sell their business through an asset sale. For practical purposes and with the exception of some real property remaining in the S-Corp - everything was sold. The sales agreement and subsequent 8594 is completed as follows: $660k worth of Class IV assets which is inventory, $2.4 mil on Class V, and $2mil on Class VI and VII. I have completed the Class V part as this was personal prop and real prop and I have accounted for that on Form 4797 and k-1 (Sect 179 assets). I am unclear on the other 2 - I could add the $660k to "revenue" and then zero out my inventory on COGS and that would "account" for the sale of the inventory. Is this appropriate or should "sale" on inventory go somewhere else? I have researched and it doesn't look like it should go on 4797. I am also unclear about the Class VI part of $2mil. This is basically over and above the assets that were purchased - - aka goodwill. I am not sure what form this goes on or how I account for this. I think it should long term capital gain but I am not sure where to put it. Will the client have any "basis" in this or will it all be gain? Any help would be appreciated.
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I'd put the $660K as revenue and zero out Inventory. That's what happened - it was sold.
I'd report Goodwill on Sch D/8949. Zero basis and long-term.
Thank you for the response. If there was say $800k worth of intangibles on the books and $600k of accumulated amortization - that would create $200k basis but the $600k would end up being ordinary income - is that correct?
That is correct assuming those intangibles were part of the purchase price; which based on your facts appears to be the case.
Purchase Price of $2 mil less $200,000 basis = $1.8 mil gain of which $600,000 is ordinary and $1.2 mil is capital gain
After discussing with the client, the original intangible was created when they purchased the business and they are still paying this through an installment sale. There is still some remaining assets so I think this asset will stay on the tax return under assets. I still must "account" for the $2mil per Form 8594. Shouldn't some of the shareholders basis in the S corp be a part of the basis and reduce the gain? He should have approximately $1 million that I think would follow this transaction. The ending balance sheet will have approximately $500k in real property that was retained. If I don't get to use any of the shareholder's basis - my balance sheet will have $500k of property and RE of $1.5mil. I am still working through all of the balance sheet items but I am struggling with the shareholder's basis and how much gain on the sale transaction. Any help appreciated.
You are confusing the issues here:
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