There's no such thing as a "purchase price" for a business per-se. But how you deal with this on your tax return depends on what type of business you bought. Please read the below definitions of the most common business types, and let us know what you have here. We'll also need a bit more detail on what this business does. Sell product? Manufacture product? Provide services? Something else more definitive?
Sole Proprietorship – This is a business with one owner, and
only own owner. There are no other investors or share holders. This type of
business is considered a “disregarded entity” by the IRS. All income and
expenses for the business are reported
on SCH C as a physical part of the owner’s personal tax return. Again, a
sole proprietorship has only own owner. Depending on what state the business is
in, registration is not required at the state level. But it may be required at
the county, town, or other level of government below the state. For example,
your county may require you to register and obtain a county issued Occupational
License, which authorizes you to conduct business only within the jurisdiction
of the authority that issued the Occupational License. This is most often
required when the county, city or other authority below the state taxes
personal income or imposes a tangible property tax on business assets utilized
to produce business income.
Single Member LLC - This is a business with one owner, and
only own owner. There are no other investors or share holders. This type of
business is considered a “disregarded entity” by the IRS. All income and
expenses for the business are reported
on SCH C as a physical part of the owner’s personal tax return. Again, a
single member LLC has only own owner. This type of business is required to be
registered at the state level, weather that state taxes personal income or
not. Additionally, this type of business
may also be required to obtain an Occupational License for the county(s),
city(s) or other more localized jurisdictions within that state, in which the
business will be operating in.
Multi-Member LLC – This is a business with more than one
owner. It’s also the exact same as a
Partnership (for tax purposes) This type of business also has to register at
the state level, and may also be required to obtain an Occupational License
from more localized jurisdictions within the state, in which that business will
operate. This type of business will file
its own physically separate tax return with the IRS (and state if applicable)
referred to as a Partnership Return, on IRS Form 1065. When completing the 1065
(using TurboTax) the business will issue each individual owner a K-1 reporting
the income (or loss) of each owner. Each owner will use this K-1 to complete
their personal return. So an owner can’t even start their personal return,
until after the 1065 Partnership Return has been complete, filed, and all K-1’s
issued to all owners.
LLC “Like an S-Corp” – For tax purposes only (and I
reiterate: FOR TAX PURPOSES ONLY!!!!!) one can elect to have the IRS treat
their single member LLC or multi-member LLC “like an S-Corp” ****FOR TAX
PURPOSES ONLY!!!!!**** This means your
business is treated like and considered to be a physically separate taxable
entity. This is accomplished by filing IRS Form 8332 – Entity Classification
Election. This allows you to act as if your single member LLC or multi-member
LLC is an S-Corp. But understand that if you want the IRS to treat your LLC
like an S-Corp, then the business “must” act like an S-Corp, and follow all the
laws, rules and regulations required of an S-Corp by whichever state your LLC
is registered in. All business income and expenses is reported on IRS Form
1120-S – Income Tax Return For An S-Corporation. The S-Corp will then issue
each owner, investor and/or shareholder a K-1 which they will need before they
can even start their personal tax return.
Unlike a single member LLC which is considered a disregarded entity for
tax purposes, an LLC that has filed form 8332 – Entity Classification
Election “is” considered and treated
like a separately taxable entity.
S-Corp – This type of business is registered at the state
level and must conform to the laws, rules, regulations and ordinances of that
state which apply to an S-Corp. All business income and expenses is reported on
IRS Form 1120-S – Income Tax Return For An S-Corp. The S-Corp will then issue each owner,
investor and/or shareholder a K-1 which they will need before they can even
start their personal tax return. Unlike
an LLC which is considered a disregarded entity for tax purposes, an
S-Corp “is” a separately taxable entity,
and therefore files its own physically separate tax return and issues K-1’s to
all owners, officers, investors and shareholders.
C-Corp - This type of business is registered at the state
level and must conform to the laws, rules, regulations and ordinances of that
state which apply to a C-Corp. All business income and expenses is reported on
IRS Form 1120 – Income Tax Return For A C-Corp.
The C-Corp will then issue each owner, investor and/or shareholder a K-1
which they will need before they can even start their personal tax return. A C-Corp
“is” a separately taxable entity, and therefore files its own physically
separate tax return and issues K-1’s to all owners, officers, investors and
shareholders.
