[MeaningOfLife]

Hi - I'm not using QuickBooks or any standard software. I helped with the books for a small pet grooming company. Early on, the owner borrowed about 10k from a family member to keep the biz open. When the biz was sold, he paid off this biz liability. Is there any reporting that needs to be done on the Schedule C? Or is this just across the board handled on the books and will come up in the event of an audit? I do not see the money as 'income' as it went directly to paying off the business debt. I don't know - am I missing something here? Thanks 4 ANY help!

[ArcSine]

The actual transaction of repaying the debt doesn't appear on Schedule C as a deduction, in the same way that the original borrowing of the 10K isn't reported as income.

But if the 10K that was used to repay the family loan was part of the proceeds from the sale of the business, then the 10K---along with the rest of the sale proceeds---is reported on the return as part of the sale.

On his tax return the owner will report the full selling price of the business, regardless of how the proceeds were distributed---i.e. whether the owner kept some, used some to buy a car, and/or used 10K of it to repay the lending relative.

The owner will also report on the return his "tax basis" in all the sold assets, as a deduction against the total sales proceeds. The difference between the sales price and the sum of the sold assets' tax bases will be taxable gain or loss on his return.

[MeaningOfLife]

Thank you ArcSine! I also need help with advising my client. Since the people who bought the business changed the name slightly and since the selling price was appreciably less than expected, my client wants to avoid any mention in his documentation of a 'sale.' He wants to refer to it as a transferring of the store front lease and fixed assets (office equipment, business tools, etc.). The business, in essence, is liquidated and did not continue - a business with a very similar name continued in the same site.

From what you have said, the tax bases might impact the amount anyway - and he might show no gain. I am not sure how to do a 'tax bases' calculation. Can you direct me to info on this that is easy to understand? Thank you again for all your help.

[ArcSine]

Glad it helped a bit.

As a very brief overview, here's what needs to be done...

1. Make a list of every asset that was part of the sale.
2. For each asset on the list, come up with two numbers: First, an estimation of the fair value of the asset as of the sale date. Second, the asset's tax basis.
3. Allocate the total sales price to the assets. If the total sales price exceeds the sum of the fair values, then allocate sales price to each asset equivalent to its fair value, and the excess is considered the sale of an asset called Goodwill. If the sum of the fair values exceeds the total sales price, then allocate the sales price to the assets in a pro-rata manner, based on their relative values.
4. Compare each asset's allocated sales price to its tax basis to determine the gain or loss for the asset.

In other words, a sale of a business is actually treated on the tax return as individual sales of each asset. How you report these sales depends on the nature of each asset.

An asset's tax basis is generally its original cost, less any depreciation that's been taken on the asset up to the date of the sale. Obviously, for non-depreciable assets such as inventory and land, tax basis = cost.

Simple illustration: I sell my biz for $1,300. This business consists of just two assets, a desk and a computer. Suppose the desk cost me $700, and I've depreciated it down to $400. For the computer the original cost was $1,200 but I've depreciated it down to $800.

Suppose further that the desk has a fair value of $600 and the computer's fair value is about $900.

In this scenario the sales proceeds of the biz (1,300) is less than the sum of the two fair values (600 + 900 = 1,500). So here I must allocate the 1,300 to the two assets pro-rata. Based on their relative fair values, I allocate 6/15 of the 1,300 to the desk and 9/15 to the computer (520 and 780, respectively).

Now on my return I show that I sold a desk for $520, an asset which has a tax basis of $400. Hence I report a gain of $120 for this asset. I also show a sale of the computer for $780. Since my basis in this asset is $800, I have a $20 loss to report for this one.

Hold constant all the previous suppositions, except that I sell the biz for $2,000 instead of $1,300. In this scenario I allocate the $2,000 of total price to the assets as follows: 600 to the desk and 900 to the computer (their fair values), and 500 to an intangible asset called Goodwill.

Goodwill is considered a capital asset, and will generally have a basis of zero. Thus I'll have 3 asset sales to report on my return. After comparing each asset's allocated price with its tax basis, I'll have (a) sale of the desk producing a net gain of 200; (b) sale of computer producing net gain of 100; and (c) sale of Goodwill generating a capital gain of 500.

That was a very simplified overview. Here's a site I came across that fleshes it out just a bit more...

http://www.qbsnet.com/asset-sales.php

These asset sales will generally be reported on Schedule D and/or Form 4797, depending on the nature of the assets. Also note Form 8594, mentioned in the linked article, which will probably be a player in the return as well.

Such sales can be tricky waters to navigate when it comes to preparing the return correctly. Be sure you either research the subject enough to be comfortable with the reporting requirements, or enlist the help of a tax pro who's got a few biz sales under their belt.

Best of luck with it!