I sold a portion of my small business function to another business in 2022. I continue to operate the remaining functions of the business. How do I report this long-term capital gain while keeping the business open?

[Workflow1]

I sold a specific, stand-alone portion of my small business (processes, database, suppliers developed over multiple  years,  non-compete, etc.) for cash   to another business in 2022. I continue to operate the remaining separate non-related  functions of the business. How do I report this long-term capital gain while keeping the business EIN  open? I am using Turbotax Home and Business. 

[RobertB4444]

What you've done is called divestiture and it should be reflected as a sale of the company's stock.  The portion of the company's stock that was sold is the basis of the transaction and the amount received is the amount you sold it for.  You'll enter it as a capital transaction with the date of the creation of the stock as the origination date.

If you haven't created stock for your company I recommend consulting an attorney and a tax professional to make sure this transaction is entered properly.  You don't want to get this one wrong.

@Workflow1

[Workflow1]

HI Robert, 

I have an LLC with me as sole owner.  no employees. 

I received a check from sale made out to my LLC.  no inventory or property. Simply transferred  body of knowledge via training and various data files.  Does that make it simpler?

Just wanted to make sure I enter it correctly as a long-term capital gain in Turbotax Home and Business software. 

Thank you for the quick reply!

[JosephS1]

It depends if this is a capital gain item or an ordinary income item.  AS RobertB4444 states, what you did is called divestiture. It is different in a Partnership situation than simply selling a portion of stock from a corporation.  It may very well be an ordinary income item if you have previously not classified what you sold as an intangible asset subject to amortization.  Do you have records indicating the amount of time and materials expended to justify a cost basis?  

Above, you stated "Simply transferred body of knowledge via training and various data files" as the item(s) you sold.  If, again you have these items combined as an intangible asset subject to amortization in the Company, the capital gain treatment may be allowed.  I suggest you check the link to the IRS below and scroll down to the sale of intangible assets.  The is also another link to a recent publication that expands on the matter.  Depending on how the wording of the sales agreement states, that too may have a bearing on whether this is a capital transaction or an ordinary income transaction.

Publication 544

Self Created Know How

@Workflow1

[Workflow1]

Joseph, 

Thank you for the insight. I do have a sales agreement. I will work with my accountant to properly classify it. 

Best Regards, 

Jeff