s corp asset sale

[PatCM]

My business partner and I sold our S corp in 2019, and I will be receiving payments over 5 years.  A portion of the 2019 payments flowed through the final k-1 and all expenses were applied against those amounts.  The balance of my 2019 payments were paid to me directly and the buyer has issued a 1099-Misc for those amounts.  The accountant for my prior company has told me that those payments and all future amounts are long term capital gains.  how do I reflect that in turbo tax?

[smarttees]

you need a tax pro...you have something like an installment sale but you can't use that for the sale of depreciating assets or inventory....get an accountant who is familiar with these types of sales.

[ThomasM125 · Accepted solution]

The gain on sale would be capital gain income for the most part, unless you had depreciation recapture, in which case some of the income could be considered ordinary income. 

You report it in TurboTax under "Income and Expenses", then "Less Common Income", then "Installment Sales". You will be asked to enter the sales proceeds, basis of the property and amount of any prior depreciation taken.

Once your gross profit is determined, you will be taxed on that percentage of the proceeds you receive in the current year.

[PatCM]

Thanks, but it was a consulting firm and we basically sold our client list (goodwill).  The down payment and expenses, and ordinary income portions were taken care of in my final K-1.  The firm's accountant already confirmed that the remaining payments are installment sale capital gains.  I did get my solution as to how to reflect it in turbo tax  elsewhere though.

[slavennevjestic]

Can you tell me how you reported it since I sold my Insurance agency book of business (same as your case, just clients)  and having hard time to find how to report Capital gain.

[PatCM]

I reported it in the Installment sale portion of Other Income as suggested by Thomas M's answer to my initial post.

[Ashleeward]

I have a question in regards to a situation that very similar to this. I sold my S corporation with a bunch of different classes such as asset sale, goodwill, inventory, covenant not to compete, etc. I have reported this properly in my 1120s so it followed over to my K1. On my personal side, it's asking for the sales price and the basis so it's treating it like a stock sale. Do i just skip this part and go straight to what my K1 one has? 

[DavidD66]

It sounds to me like you didn't actually sell your S-Corp, rather your S-Corp sold all of it's assets.  If you recorded all your asset sales in your 1120-S return, all you would have is capital gains reported on your K-1.  Did you sell all the stock in your S-Corp?

[Ashleeward]

Yes- no stock was sold. It was a franchise and an asset sale but the actual corporation wasn’t sold. We agreed and I filled out the Form 8594 in my 1120S.  Thank you for reconfirming exactly what I was thinking. Along the lines of the asset sale- it was reported on my k1 and section 17 referred me to my 179 disposition report. In that respect, I would just split all info 50/50 because my Hsiang and I owned the company 50/50? Thank you SO very much! 

[DavidD66]

You are welcome.  One other thing to consider is how you treat your Covenant not to Compete.  Where the owner enters into a compensatory noncompete covenant, the consideration received is taxed to the owner at ordinary income rates, whether the transaction is structured as a stock or asset sale. However, where the covenant is entered into simply to effectuate the transfer of the business goodwill, the covenant does not necessarily result in ordinary income to the recipient, but rather may be considered part and parcel with the purchase of the business. In such a situation, the value attributable to the covenant may result in capital gain treatment.

For more information see the following article in the AICPA publication "The Tax Advisor"  Noncompete Covenants in Mergers and Acquisitions: Compensation or Capital Gain?

[Ivettewong]

Hi David, this is my first time asking a question about TurboTax and I hope I’m doing it through the correct channel.

my husband sold his SCorp membership to the other partners in August 2019. The SCorp was at the same time closed and ex-partners re opened under a new SCorp.

The amount agreed for the membership interest was a total of 100k broken down into prior distributed profits of 60k, reimbursement for legal fees if 100k and purchase of the membership for 40k. Original contribution to the SCorp was 5k.

How Can I record this?
The cash received for this agreement was 55k in 2019 and we are supposed to receive remaining 45k in 2020

we received a K-1 with box 16 showing the amount of 40k.

Thank you in advance for your guidance.