Purchase and sell a salon

[Jessica Ly]

I have a client who purchased a nail salon and opened LLC for her nail salon in Jul 2022 . She operated it from Jul to Nov 2022, then sold it in Dec 2022. 

The purchase agreements show the lump sum sale price. She purchased the salon $15k, then sold it to another one with $30K. 

Can you please advise how to report the purchase price when she bought her salon ($15k) and the selling price ($30K)when she sold it in proseries. Thank you!

[IRonMaN]

It would be easier if we knew exactly what she bought and what she sold.

[Jessica Ly]

She bought a nail salon with purchase price $15K. She operated it in 5 months, then she sold it to another one with the price $30K. Thank you

[sjrcpa]

What comprises "nail salon"? 

Inventory, client list, linens, chairs and equipment?

[abctax55]

Don't forget "product".... aka inventory.  At some salons, that stuff is expensive.  

(especially the product to make hair purple 😉

[Jessica Ly]

Inventory, Supplies, pedicure chairs, tables, furniture. The previous owner left everything in the salon for her. She bought it with the purchase price $15k in Jul 2022. After she owned it, she bought more supplies/inventory, repaired/renovated (painted walls, ceiling, upgraded bathrooms, decorated the salon). However, she couldn’t make money, so she sold it $30k to a new owner in Dec 2022. How I can report $15k ( she bought) and $30 ( she sold it) in Schedule C or schedule D? . Thank you 

[taxes96786]

report disposition of depreciated items and enter sales amt. Then go to Sch D and see whether any adjustments are needed.

[Jessica Ly]

do I have to report $15k on line 13 ( depreciation and section 179 expense deduction)? How about $30k she received when she sold her salon? Which line in schedule to report the income $30k? Can I put $30k on line 6 (other income). Do I need to finish any form else? Thank you for your help! 

[Andrew Warner]

Since all of this occurred in the same calendar year (2022) and for no more than a six month period, I would report all of this on a Schedule C.  This Schedule C also would include all the business activity for the time the business was operating during 2022.  

Again, to make it easy, there could be a single entry of $15,000 in "Other Income" which would include both the proceeds from sale of the business ($30,000) and partially offset by the initial purchase amount/price ($15,000).

[IRonMaN]

But it’s not 30k vs 15k.   You said she she put more money into the business.  You need to get a handle on the dollars before you can prepare that return

[Jessica Ly]

Hi Iron, can you please explain more details? Thank you Iron for your help!

[Jessica Ly]

Thank you Andrew!

[IRonMaN]

For each category, (inventory, equipment, leasehold improvements, plus anything else) you need to know the breakdown of the original purchase price and how much additional was spent for those categories.  You then need to know the breakdown of those categories for the selling price.  Following the post that you deemed to be the solution isn't going to give you the correct total tax liability for your client.

[abctax55]

@Andrew Warner 

Putting any gain, or loss, on the purchase & subsequent sale of ASSETS on a Sch C is incorrect.  Doing it that way would either increase, or decrease self-employment income and self-employment tax.  

@Jessica Ly  - I suggest you put this return on extension, and find a local mentor to assist you.  While the numbers aren't large, the concept of what goes on Sch C vs the sale of assets is important.

You should also 'unclick' if possible the solved solution, for future searches as it is wrong.

[Jessica Ly]

Hi, both of purchasing agreements don’t have the breakdown of the purchasing prices. I asked her to contact the previous owner and the new owner to work on allocation of the purchase price and the selling price, but they didn’t know, and couldn’t help my clients. Do you have another solution for this case?

I am concerning if I report 15k on “other income” in Schedule C, “$15k” is subject to self-employment tax in Schedule C. Can I exclude “15k” from self-employment tax? Thank you 

[Jessica Ly]

@abctax55 Thank you.

[rbynaker]

Somebody has to come up with an allocation (and unless you're in the business valuation business, that somebody shouldn't be you.)

IRS Form 8594 is a good starting point.  Form and instructions can be found here:

https://www.irs.gov/forms-pubs/about-form-8594

As with any business, you can't do the tax return until someone has done the bookkeeping.