"Typically a noncompete is between a buyer and the owner(s) or key individuals; not the business. This noncompete is generally a separate agreement; but not always. Regardless, noncompete proceeds are ordinary income when received."
If this is "ordinary income" should it be reported on 4794 Part II Line 10?
"I'm not sure that I understand the lease transfer. Not sure why there were purchase proceeds allocated to that. There are cases when a lease is transferred and there is some type of a premium received as a result of a change in lease payment, and those would most likely be reported in Class VI. That premium would be reported as ordinary income as well. But I'm not sure I have a good understanding of this component of the purchase."
The LLC had a property rental lease with several years remaining. The buyer took over the lease in exchange for a $ payment. Standard retail practice. So the seller got out of the remaining lease obligation and the buyer took over a valuable location.
If this is "ordinary income" should it be reported on 4794 Part II Line 10?
In summation it looks as though both revenue items are ordinary income and 4797 Line 10 is the place to put them with an acquisition date the same as the disposal date and zero cost.
Instructions for form 4797 Line 10 says:
"Report on line 10 ordinary gains and losses, not included in line 11 through 16, including gains and losses from property held 1 year or less".
I'm wondering whether the 4797 is in fact the correct place to put these 2 items. It seems that's really for regular assets. I'm also not sure how to get them into TT H&B - i.e. what feeds line 10, either. An alternative seems to be to enter them on the K1s directly on line 11 "Other Income /Loss)". I need to read the K1 instructions on that.
Any thoughts?
BINGO (at least on the Non-Compete). I believe the Lease Proceeds should go here too.
1065 K1 Instructions re Line 11 say:
Income from intangible property if the partner is an individual whose personal efforts significantly contributed to the creation of the property;
Income from state, local, or foreign income tax refunds; and
Income from a covenant not to compete if the partner is an individual who contributed the covenant to the partnership.
