Sale of Sole-Prop Business

[ProActive Bookkeeping Consultant]

I have a sole-prop client who sold their business in 2017 for a total of $75,000.00. 

They and the buyer both completed Form 8594 allocating $32,214 to Class V and $42,786 to Class VII (goodwill).  Of Class V, $10,904 has depreciable assets and the remaining $21,310 are non-depreciable assets such as chairs, garbage cans, mops, mats, coffee maker, etc; all items used to operate the business.

I understand how to account for the assets we have been taking depreciation on and the goodwill (self-created), but for those other items, I would account for on Form 4797 as non-depreciable, they would go in Part II and would be considered ordinary gain or loss?

It would be interesting to know how this will work from the buyer’s perspective as well.  They would get to take depreciation on the agreed upon sell price of $10,904 in depreciable assets and $42,786 of goodwill, but how do they classify the $21,310 of non-depreciable assets?

[TaxGuyBill · Accepted solution]

Yes, I would put it in Part 2 of Form 4797.

Those costs would probably be Startup Expenses (or possibly just general Supplies) for the buyer.

[rbynaker]

$21K, that's a lot of garbage cans!

I don't think you have startup expenses for purchasing an ongoing business (I may be wrong and/or it may depend on the business) but it probably comes down to what's really going on in the transaction.  I'm fine with $1K of misc "stuff" just being written off as supplies but when it's 25-30% of the total purchase price it just doesn't pass my sniff test.  What's the $20,000 item that's hiding in the $5 garbage can? 🙂

Rick

[TaxGuyBill]

LOL.

§195(c) does say Startup Expenses include the "acquisition" of a trade or business.

[rbynaker]

195(c)(1)(A)(i)?  That's for "investigating," I don't think it applies to the actual acquiring.  Note that "or acquiring" is not mentioned in (ii):

https://www.law.cornell.edu/uscode/text/26/195

So paying the accountant for due diligence on a business you're thinking about buying would be investigating.  Buying a garbage can is just buying a garbage can.  Unless there's $20K of unsold inventory in it.

[ProActive Bookkeeping Consultant]

Rick, the company was a gym, so they have quite a few miscellaneous items they used to run it.  I just didn't list them all, but vary from those items I mentioned to jump ropes, dumb bells, fans, dry erase boards, cork boards, and on, and on.  They kept track of every single item they purchased for the business.  I appreciate the responses.

[rbynaker]

Fair enough!  Thanks for the clarification.  I could probably be talked into supplies if they're all de minimis.

On your end of it, I think selling something that was previously written off as a supply just results in ordinary income.

Rick

[TaxGuyBill]

@rbynaker   So you want me to read the ENTIRE sentence in the Code?  Picky picky.