Sale of Business at a loss

[caboulto]

Registered users do not see advertisement

I have a business that was sold in 2009 for $16,000. $6,000 of this was assumed debt (rent owed) and the other $10k was to be recieved in cash on a payment plan (no bank involved). The total adjusted basis was about $17k, so the business sold at a loss. To date, only about $300 has been recieved by the seller (is pursuing legal means to start receiving payments).

In the meantime, how do I account for this sale on the tax return? It is a sole proprietership. All assets are being depreciated, but I do still need to enter in a sale date for each of them so depreciation is not calculated for the entire year (haven't done this yet since I wasn't sure if I could lump it with the sale). But I do not know how to account for the sale on the return, particularly since only $300 has actually been received (+debt sold I guess).

It is my understanding that I cannot do an installment sale, since it was sold at a loss, even though that is what is going on. Do I just do a form 8594, asset acquisition, and use the total sales price?

Any thoughts or help are appreciated. Thanks.

[Skyhawk]

The sale of a "business" as an assembly of assets is provided for in the tax code in sections 1060 and 338(h)(10). Cash and liquid securities are valued at face value, that is a $1 is a $1. All other assets and liabilities are valued at fair market value (fmv). Then each asset at it's fmv is compared to the total fvm and thaT PERCENTAGE OF THE SELLING PRICE IS ASSIGNED TO THAT ASSET. FOR EXAMPLE: if asset A is 10% of the total asset value then 10% of the selling price is assigned to asset A. You then compare the selling price of asset A to its tax basis and then determine gain or loss on asset A. Note thaqt there is an agreement that has to be signed by both the buyer and the seller so that the value used by the seller is also used by the buyer in determining his/her cost basis in the individual assets. Assets that are ordinary income producing assets generate ordinary income (gain or loss), and depreciable assets may get ordinary loss treatment via section 1231, but get capital gain treatment is sold at a gain. Depreciation recapture also has to be considered as well as any credit recapture if applicable. See code sections 1245 and 1250regarding depreciation recapture. Also note that assumed liabilities, by the buyer, are treated as cash received. Also consider what accounting method is being used. Are you on the cash method, or ACCRUAL METHOD? This determines when amounts get reported, generally.
If you end up with a bad debt situation note that the loss is not deductible until the amount is fixed and determinable. Also note that there can be a gain or loss on a reposession if you end up having to reposess the assets. The above is an over simplified explanation of this tax issue. You should see a tax professional such as a CPA or Enrolled Agent.

[caboulto]

Thanks Skyhawk for the quick reply - I think I will go see someone who can help. But to answer your question, accounting is done on the cash method.

Is the selling price used to allocate reduced by the amount of cash received and assumption of debt? I was reading about the residual method and thought I read this.

In future years, when cash is received from payments, how do those go on the return, or do they not, since we already accounted for the total sale on this years return?

[Skyhawk]

The selling price in total is allocated to the assets. The allocation first goes to liquid assets, then to tangible assets and some intangible assets like pattents and trade marks, and the RESIDUAL goes to goodwill, e.g. customer lists, customer, supplier, or employee contracts, and other intangibles that are valuable. The cash received and any liabilities that are assumed are payments. If you do not qualify for the installment method of reporting the sale then the gain or loss is reported in the year that title transfers (the deal is done) and future payments are not taxed with the exception of interest income. Your sale is not going to be to complicated but you should seek professional help.