Sale of a restaurant with assets and goodwill - Installment sale

[Mickey1]

Dear accounting and tax experts: 

I'm hoping somebody can help me to record a restaurant business sale with assets/goodwill on an installment method.

A client sold her restaurant.  With the exception of a small amount of depreciation left on  kitchen equipment, she has about $35K left on Goodwill.  She entered into an sale installment agreement with the new owner.   They will pay her a set amount each month until it's done (the sale price of the business is $100K). 

 I completed the following forms and have questions for each.

1.  Form 6252 - Installment sale income putting down what they received during 2019 (sale date 9/1/19) and let the program calculate the long term gain. 

2.  Form 8594 - Asset Acquisition Statement marking her as the "seller" - Do I need to do this?  I've never done one before.  Is this required?  Does anyone know?

3. Asset Entry Worksheet - For each asset I entered the date of disposition without entering the sale price amount.   If I do that, it will calculate a taxable gain for 2019.  So I left it blank thinking we'll report any gains on the form 6252 installment sale.  The reason for this is the seller, my client, "did not" receive all of the sales proceeds.   Is this correct?

The buyer is paying her a set amount each month for the next couple years.  So I figure we'll report the pro-rate of capital gains on form 1040 schedule D every year until the payments are finished.  What's your opinion on this?

I'm asking the community to let me know if I'm close to doing it correctly.

Thank you for your help.

Mickey

[dd4vols]

Where do I begin... well #2 is the easiet… that form is required.. and buyer and seller have to report the exact same things and amounts.  

#1 & 3 ok.. so the sale of the business is really the sale of the assets, inventory, and and goodwill/non-compete amounts agreed on.

So... if she sold 74 assets.. she really has 74 sales.. so your are going to have to determine a sales price for ease depreciable asset sold and record the sales in that section of the asset entry form. I usually do an excel spreadsheet to prorate sales price based on original cost(, or some similar formula).  On each depreciable asset,in the disposition section.. there is also a  box to link to a 6252 sale.  And I think you can link all 74 sales (in my example) to the one Form 6252.  If by chance... she got less for the equipment (the depreciable assets) than the book value…. you can report all of those losses on the 4797, skip a form 6252... and only report the interest collected each current and future  year on Schedule B.  Additionally, you could opt to report all of the gain on the depreciable assets (if minimal)..on the 4797. and dispense with the 6252 for current year and future years... and only be responsible for reporting and paying taxes on the interest earned in those years. 

obviously the inventory part...would be reported as sales in her ( i'm guessing) Schedule C.  And any goodwill/non-compete as a Sch D item.

[Mickey1]

I did like you suggested.  I created an excel spreadsheet listing the 7 assets, with their accumulated depreciation and adjusted basis.  Took a % of each against the total  fixed assets,  multiplied % by $10K allocated to sale of F/A to come up with a sale price value for each.  

Issue 1 - I put a sale value underneath the disposition date for one of them, the program is saying there's an error for one of the entries.  The asset shouldn't be linked to 6252 because the sale doesn't quality for the installment method because the gain does not exceed the income recapture computed on form 4797 part III.  Not sure how to fix this.

Issue 2 - The other issue encountered is if I put a value on the Asset Entry worksheet along with the disposition date, it increases the ordinary income to the shareholder.  This doesn't seem correct...does it?

Issue 3 - Now there's an error on the 6252 under Date Acquired.  When I linked multiple assets Proseries changed date to "various" which the program doesn't like.  It turned red for error.  It says the date is invalid for electronic filing.  Grrr....

This is indeed a difficult one for me.  Is there another way, less difficult method?  The client expects to pay capital gains.  But they should only do it on "realized" gains don't they?  Meaning recognize the gains when those installment payments come in?  And not now on the entire sale?

[dd4vols · Accepted solution]

1).  ok... you will just NOT LINK that part to the 6252..will just show up on the 4797... you can't have a 'loss' as any part of an installment 'gain' Should not impact the sales amounts on any of the other assets..

2) of Course it increases the ordinary income to the shareholder... recapture of the deprecation taken on the asset IS ordinary income... just like the depreciation expense when taken, reduced ordinary income.  You only get capital gain treatment for the part of  the sales price that is greater than the original purchase price.   If they sold the items for less than the original purchase price...the amount of installment income EACH year will be ordinary income!!

3. I'll have to think on that....

[dd4vols]

Issue 3... I think you could just maybe put any of the assets acq date in the red box...see if that works..especially if all are over a year old.

[swongtax]

Hi,  

I was wondering if you ever figured out how to complete this on Proseries?

SW

[George4Tacks]

Yes you need to complete the 8594. Showing both buyer and seller information and a proper allocation of the whole sales price to the various classes of assets, not the individual assets.
https://www.irs.gov/instructions/i8594#idm140044335719168

[Jean40]

I didn't see a response to how to enter income from the sale of Goodwill.