How to account for a deposit received in 2024 for the sale of a business in 2025?

[seadonkey79]

I sold my business in 2025, but received a deposit check prior to the sale, and deposited that check in 2024. How do I account for the deposit amount received in 2024? Do I include the deposit amount as income for 2024? Are there capital gains to worry about? The sale includes equipment, outstanding contracts, and goodwill. I'm using Turbotax Business for an LLC Partnership. 

[seadonkey79]

Where I have it now is in "All Other Income" where I've described the transaction accordingly as "Sale of Business Deposit." I'm know I'm paying taxes on that amount in 2024, because it's changed my +/- considerably.  I'll assume for now, that for tax year 2025, I won't have to include that amount again (in hopes of not being double taxed), but rather I'll enter the details of the sale of the business and the categorized totals accordingly, and only enter the remaining proceeds of the sale less the amount received in 2024. 

[Rick19744]

A number of questions:

• I'm assuming that there is a purchase / sales agreement?
  • What is the effective date of the sale in the contract?
• Has the buyer and seller completed form 8594?
  • What's the date listed on this form?
• Will you be filing a final form 1065?
  • This will be due the 15th day of the 3rd month following the sale
  • The problem here is that the 2025 tax forms will not be finalized for a long time; closer to the end of 2025.
  • This will necessitate you filling an extension
  • I also wouldn't file final 2025 return close to when you file your 2024 form 1065 to minimize any confusion at the IRS.
• Were the $$ just earnest money?
  • Would these funds be returned if the sale is not completed?
  • These $$ are not taxable until you either finalize the sale, or you receive these funds if the sale is not completed.

[seadonkey79]

Thank you for your response.

The date of the purchase agreement is a January date in 2025. 

8594 has not been completed. I assumed that since the sale takes place in 2025, the 8594 would be completed with our 2025 tax forms?

Final form 1065: the sale date is Jan. 2025, so the final 1065 would be 2025's, not 2024's? We won't have (many) business expenses in 2025, but the sale date is in 2025, so I assumed that I report the sale of the business with my 2025 tax return?

You're saying the final form 1065 has to be competed the 15th day of the 3rd month following the sale, which I did not know. This would be our 2025 return, since the sale and contract dates are both in 2025. This means I should file an extension for the 2025 return now, in March of 2025? I understand your advice of waiting on the 2025 return, by use of a filing extension, in order to prevent confusion.

The deposit dollars were essentially earnest money, yes, and would have been returned had the sale not gone through. The funds were received in Dec. 2024 and the date of the sale, per contract, was Jan. 2025. By what you're saying, I shouldn't report the earnest money/deposit funds on my 2024 tax return, is that correct?

By the sounds of your advice, and I understand your disclaimer, I should hold off on reporting the earnest money in 2024, and report the full sale amount on my 2025 tax return. Also, I should file a business tax extension for the 2025 tax year now, due to the final 1065 timeline rule. And form 8594 is included/attached with the final 1065. Does this all sound correct?

[RobertB4444]

You definitely should hold off on reporting the deposit received in 2024 until the 2025 sale where it became part of the purchase money.  Before that it really didn't count as your money.

You shouldn't file an extension for the 2025 return.  You should file the 2025 return.  Since your business ended in January you fiscal year ended then too.  It ended on the date that you sold the business.  The final return is due April 15th (the 15th day of the 3rd month following the end of your fiscal year).  You should use the 2024 tax forms and tax software and create a 2025 return.  Then you should print out a copy and cross out the number 2024 and write in 2025.  Then you mail in the return.

Which will include form 8594.

@seadonkey79 

[Rick19744]

My responses are as follows:

• Based on your additional details, your 2025 final form 1065 is due the 15th day of the 3rd month after the purchase date; This would be April 15th, 2025.
• I would not file this return (2025) until you have filed your 2024 form 1065 and allowed it to "digest" into the IRS system.  This could lead to a letter writing quagmire.
• Extend the 2025 form 1065 by April 15th.
  • When filing the extension for the 2025 form 1065, I would include a letter with the 7004 explaining that the business was sold and the extension is for the 2025 tax return for which forms are currently not available.
• Based on your additional comments, just report the earnest money as a deposit; not income.
  • This assumes you are maintaining a balance sheet, which is always recommended, regardless of whether you are below the requirements of the instructions for the 1065.
• I would not delay on getting the form 8594 completed by both the buyer and seller.  Best to do this now.  This form will need to be included with both the buyer and seller's tax returns; and it should go without saying that they need to agree.
• Yes, the form 8594 will be included with your 2025 form 1065.
• Since you will most likely be paper filing the 2025 form 1065, be sure to send that return certified mail return receipt.  Very important.
• Since the 2025 form 1065 will most likely not be available when you need to complete and file the return, just use the 2024 forms and update all 2024 dates to 2025; by just lining through the 2024 and add 2025 next to it.