business income

[Fuzzmonkey]

My wife and I own an LLC. We sold a portion of the business (domains, copyrights, inventory, equipment). Does it get reported as normal income or as capital gains? And it the latter where do you report it?

[LudwigVan_fan · Accepted solution]

First, you and the buyer must allocate sales price to the different assets.  See this web site from IRS and F8594 and instructions.

https://www.irs.gov/forms-pubs/about-form-8594

Second, of the items you mentioned, some will be ordinary income, and some may be capital gains.  Here is a link to Publication 544, Sales and other dispositions of Assets.

https://www.irs.gov/publications/p544

It is possible that you may have to file Sch D; Form 4797, Form 8949.

The LLC, is that a disregarded entity?  C Corporation?  S corporation, partnership?

If not a disregarded entity, it is the entity that will report the sale...and if a partnership or S corporation, will flow-through to your F1040.

[Fuzzmonkey]

We did allocate monies to the various assets. Copyrights, web domains, inventory at cost, equipment. It is a disregarded entity.

[Fuzzmonkey]

The main question I have, is the 'ordinary income' reported as business income on schedule C and thus be subject to self employment tax?

[LudwigVan_fan · Accepted solution]

Sale of inventory would be reported on Sch C.   Sale of assets used in the business would not.  Depreciation recapture would be ordinary income, but not subject to SE and not on Sch C.  Any capital gains would also not be on Sch C.

Depending on method of accounting and other assets involved, they may or may not be reported on Sch C.

 For example, if you used cash method of accounting for tax, but had accounts receivable for books, the sale of account s receivable would be ordinary and reported on Sch C, along with sale of inventory.

[Carl]

Seems no two people here are making the same assumptions.

Sale of inventory would be reported on Sch C.

Not necessarily. Earlier it was stated:

My wife and I own an LLC.

If "we" owned the disregarded entity then it's perfectly possible that no SCH C was filed ever for this business since the business has more than one owner. More than likely a 1065 partnership return was filed.

If the owners live in a community property state and file a joint tax return, and elected to split all business transactions 50/50 and each report their half on two separate SCH C's, then even the sale has to be split between the two SCH C's.

Otherwise, the sale is reported on the 1065 partnership return and any gain/loss will flow through to the joint 1040 tax return via the K-1 that each will be issued by the partnership. A SCH C will not be involved in this in any way, shape form or fashion.

[LudwigVan_fan · Accepted solution]

Not to belabor a point, but if it was a "disregarded entity", why would they have necessarily filed F1065?  To me, disregarded entity implies no other form (1120, 1120S, or 1065) was filed.

I asked them what they did, and they never really replied; except for indicating a Sch C...they asked if sale of inventory would be on Sch C....implying to me that since they didn't answer the question directly about entity filing, and then asked about Sch C....it would appear to me they were probably filing either 2 Sch Cs, or one reflecting 1 as the owner.  I think it's a leap to assume a F1065 was filed.

[Fuzzmonkey]

Thank you for your responses. It was my wife's business in a community property state. I am listed as owner with my wife but have been passive as I had my own employment. So for the last 18 years have filed sch C with 100% my wife's income. However my wife passed last year and I am keeping the LLC open so I filed 2 schedule C's this year for 2019 taxes. So my wife had always done her Schedule C and I did the rest of our joint tax return. So I have always treated it as a disregarded entity. 

[Carl]

t if it was a "disregarded entity", why would they have necessarily filed F1065? To me, disregarded entity implies no other form (1120, 1120S, or 1065) was filed.

 If you want to get down to "letter of the law", a Multi-Member LLC is rarely a Disregarded Entity. By default, a Multi-Member LLC will be taxed as a Partnership. But even a partnership is not a corporation, since it's not formally incorporated.

[LudwigVan_fan · Accepted solution]

a Multi-Member LLC is rarely a Disregarded Entity. By default, a Multi-Member LLC will be taxed as a Partnership

Normally I would agree...but, when comes to only husband/wife owners filing joint return, things get a bit more murky.  If one of the parties was a third party filing a different 1040, I would totally agree F1065 should have been filed as then it could not have been disregarded.  But, since everything is fully reported on their 1040 via Sch C, and it was essentially her business (he said he was a silent owner and did his own employment work), and they have been doing that for years, finishing up her Sch C and his taking over the business on his own Sch C (which is now a true single member LLC disregarded entity) would appear to be correct.  Technically, when she passed away, it became a single owner LLC and appears it was that way when assets were sold.  Thus, the sale took place after the informal partnership was dissolved.  And again, any and all tax ramifications go to the parties same 1040.