Should I report payments from sale of a business?

[rapter53]

I sold a small hand craft business to a friend. I gave her an interest free loan. The total amount of the sale is $6,000 plus $150 for misc materials. She gave me $1,000 down and pays me %15 for the previous months income from the business. How and where do I report this?

[DanielV01 · Accepted solution]

The correct way to report this is to report the entire amount of the sale at the time of the exchange.  Based on the sales amount (and your basis in the business, which is your investment in the business that you have not deducted), you will claim capital gain income.  If you held your business for at least one year and one day, it will be a long-term capital gain which has a favorable tax rate.  

Then, the payments you receive are not taxed (they've already been taxed).  If you charge interest (which you state you do not), you would report the interest received as a separate source of income.  Since you are not charging interest, you report the full value of the sale at the time you signed over the business, and the payments you receive to fulfill the purchase do not need to be reported again when you receive them over time.