Selling a single owner LLC business, goodwill and tools

[dougdstoll]

I sold my business last year, it was a single owner LLC, taxed as a sole proprietor. 

I have TurboTax home and Business. The sale was mostly goodwill, with some tools, there was no property. 

I can't find where to enter the sale of the goodwill and tools.

Could you help me?

Thank you,

Doug

[ColeenD3]

The goodwill is a Section 197 Intangible. Please see this answer from Susan H.

Goodwill

In addition to filing that final Schedule C, you also have to give IRS details about your asset sales. 

Even if you dispose of the business in a single sale to one buyer, the IRS requires you to separately determine the value of each asset—the kitchen appliances, furniture, store lease, etc.—so that each is treated properly for tax purposes.

Determining the assets’ market value allows you to calculate whether there is a taxable gain or loss in each case. You list the assets, plus the value and sale price of each, on Form 8594:  Asset Acquisition Statement under Section 1060. Attach it to the 1040 you file for the year in which the asset sales occurred.

Classes of assets.

The following definitions are the classifications for deemed or actual asset acquisitions. Allocate the consideration among the assets in the following order. The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. The amount you can allocate to an asset is also subject to any applicable limits under the Internal Revenue Code or general principles of tax law.

• Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit).

• Class II assets are certificates of deposit, U.S. government securities, foreign currency, and actively traded personal property, including stock and securities.

• Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. However, see Regulations section 1.338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property.

• Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business.

• Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets.
  Note. Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets.

• Class VI assets are section 197 intangibles (other than goodwill and going concern value).

• Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible).

[dougdstoll]

Thank you, that answer helps. 

So, it looks like I enter the value of the tools sold as Class 5, and the goodwill part as class 7, both on form 8594, which I need to send in with the all the tax forms.

Then, I enter the total value of the business sale on line 6 of Sch C?

I had heard the value for the tools and value for good will are taxed at different rates. Is that true, and if so, where would that be calculated and entered?

Thank you and take care,

Doug 

[dougdstoll]

Do I enter the total value of the business sale on line 6 of schedule C? 

The business sale just included tools and goodwill, so I enter those valeus on form 8594, tools as class 5, and goodwill as class 7, and send the form with the return?

Are the different classes taxed differently? If so, where and how is this figured? I'm finding it hard to find this info.

Thank you so much,

Doug

[dougdstoll]

In trying to follow the instructions, i entered the total proceeds from the business sale on Sch C, which goes to Sch 1, line 9, and then on form 1040, line 7a. It then is added to the total income and then taxed.

But, I also entered the business sale on form SE an the SE tax was figured, and them entered on form 1040, line 15. 

So, it seems I am taxed twice for the proceeds from the business sale.

What am I doing wrong?

Thank you,

Doug,

Take care.

[ThomasM125]

The sale of the business does not go on schedule C, that is only for business income and expenses. You would bring up each asset that you sold in TurboTax and enter the sale amount for that asset. Turbotax will factor in the depreciation taken in current and previous years and determine a gain or loss on the sale and report it on form 4797.

For the Goodwill, you would report that as an investment sale as follows:

1. Find the "Income and Expenses" menu option in your TurboTax program

2. Find "Investment Income" in the list of categories

3. Click on "Stocks, Mutual Funds, Bonds and Other"

4. Work through the program to find "Choose the type of Investment you Sold"

5. Choose the "Everything Else" option in the list of investments

6. Enter the information requested about your sale (date sold, sale amount, etc)

[LudwigVan_fan]

Hi:

Just to follow up a bit on what the others have said.   Your Sch C is to report your normal income and expenses of the business.

The sale of the business is a separate transaction that can produce two kinds of income for the seller.  Ordinary income (usually recapture of depreciation...but, can include any inventory, accounts receivable that may be included in the sale)

This sale ultimately ends up on Form 4797.  The sale price must be allocated to the various assets sold and gain/loss determined on the assets. 

For more information, here is a link to IRS Publication 544, Sales and Other Dispositions of Assets.

https://www.irs.gov/pub/irs-pdf/p544.pdf

Good luck and stay safe....

[cmitchyd]

ThomasM125

In your comments below regarding asset sale, what are the tax rates (ordinary income vs capital gains) for the different Asset Classes (I to VII) in Form 8594 (Asset Acquisition Statement)?

I am looking at selling my sole proprietor LLC which only has 3 Assets that I think are allocated as follows:

1. Class III - Accounts Receivable
2. Class VI - Non-Compete Covenant (which I've heard is required to qualify for Personal Goodwill?)
3. Class VII - (Personal) Goodwill)

Are those the correct Asset Classes for those 3 Assets?

Is a Non-Compete Covenant really required to qualify for Personal Goodwill?

What are the tax rates (ordinary income vs capital gains) for these Asset Classes?

Are all 3 of these Assets from Form  8594 then "input" into Form 4797 (Sales of Business Property)?

And/or are these Assets values input into other Forms/Schedules as well? For Example Schedule C and/or D?

What are the "output" Forms/Schedules for Form 4797?  For Example Schedule C and/or D?

Thanks!

Mitch

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ThomasM125

Employee Tax Expert

‎March 25, 2020 12:41 PM

 

The sale of the business does not go on schedule C, that is only for business income and expenses. You would bring up each asset that you sold in TurboTax and enter the sale amount for that asset. Turbotax will factor in the depreciation taken in current and previous years and determine a gain or loss on the sale and report it on form 4797.

For the Goodwill, you would report that as an investment sale as follows:

1. Find the "Income and Expenses" menu option in your TurboTax program

2. Find "Investment Income" in the list of categories

3. Click on "Stocks, Mutual Funds, Bonds and Other"

4. Work through the program to find "Choose the type of Investment you Sold"

5. Choose the "Everything Else" option in the list of investments

6. Enter the information requested about your sale (date sold, sale amount, etc)

[cmitchyd]

The sale of the business does not go on schedule C, that is only for business income and expenses. You would bring up each asset that you sold in TurboTax and enter the sale amount for that asset. Turbotax will factor in the depreciation taken in current and previous years and determine a gain or loss on the sale and report it on form 4797.

For the Goodwill, you would report that as an investment sale as follows:

1. Find the "Income and Expenses" menu option in your TurboTax program

2. Find "Investment Income" in the list of categories

3. Click on "Stocks, Mutual Funds, Bonds and Other"

4. Work through the program to find "Choose the type of Investment you Sold"

5. Choose the "Everything Else" option in the list of investments

6. Enter the information requested about your sale (date sold, sale amount, etc)

[cmitchyd]

Collen,

What are the tax rates (ordinary income vs capital gains) for Asset Classes I to VII ?

[ColeenD3]

Tax Rates

[cmitchyd]

ColeenD3

Thanks for the general tax rate information but what I'm really trying to understand is the "tax category" (ordinary income tax rate vs capital gains tax rate) for the IRS Asset Classes I thru VII on IRS Form 8594.

I'm especially interested in whether Class III (Accounts Receivable) , Class VI (Covenant Not to Compete), Class VI (Financial Contracts), and Class VII (Personal Good Will) are taxed as ordinary income or capital gains.  Do you know?

I believe IRS Form 8594 is used to complete IRS Form 4797 - which can be complete using Turbotax?

Can I use TurboTax to handle a sale of business assets?  If so how?

[ThomasM125]

The sale of accounts receivable is ordinary income, the other assets you mention are depreciable business assets so the gain on them is treated as capital gain income except for the deprecation on them, which is taxed as ordinary income.

You need to edited each asset entry in TurboTax and assign a sale price to them, and TurboTax will make the necessary entries on form 4797 to report the gain or loss on sale.