Form 8594 and sale of S-Corp Assets

[Progturner]

I had a client  sell their business through an asset sale. For practical purposes and with the exception of some real property remaining in the S-Corp - everything was sold. The sales agreement and subsequent 8594 is completed as follows: $660k worth of Class IV assets which is inventory, $2.4 mil on Class V, and $2mil on Class VI and VII. I have completed the Class V part as this was personal prop and real prop and I have accounted for that on Form 4797 and k-1 (Sect 179 assets). I am unclear on the other 2 - I could add the $660k to "revenue" and then zero out my inventory on COGS and that would "account" for the sale of the inventory. Is this appropriate or should "sale" on inventory go somewhere else? I have researched and it doesn't look like it should go on 4797. I am also unclear about the Class VI part of $2mil. This is basically over and above the assets that were purchased - - aka goodwill. I am not sure what form this goes on or how I account for this. I think it should long term capital gain but I am not sure where to put it. Will the client have any "basis" in this or will it all be gain? Any help would be appreciated. 

[sjrcpa]

I'd put the $660K as revenue and zero out Inventory. That's what happened - it was sold.

I'd report Goodwill on Sch D/8949. Zero basis and long-term.

[Progturner]

Thank you for the response. If there was say $800k worth of intangibles on the books and $600k of accumulated amortization - that would create $200k basis but the $600k would end up being ordinary income - is that correct? 

[Rick19744]

That is correct assuming those intangibles were part of the purchase price; which based on your facts appears to be the case.

Purchase Price of $2 mil less $200,000 basis = $1.8 mil gain of which $600,000 is ordinary and $1.2 mil is capital gain

[Progturner]

After discussing with the client, the original intangible was created when they purchased the business and they are still paying this through an installment sale. There is still some remaining assets so I think this asset will stay on the tax return under assets. I still must "account" for the $2mil per Form 8594. Shouldn't some of the shareholders basis in the S corp be a part of the basis and reduce the gain? He should have approximately $1 million that I think would follow this transaction. The ending balance sheet will have approximately $500k in real property that was retained. If I don't get to use any of the shareholder's basis - my balance sheet will have $500k of property and RE of $1.5mil. I am still working through all of the balance sheet items but I am struggling with the shareholder's basis and how much gain on the sale transaction. Any help appreciated. 

[Rick19744]

You are confusing the issues here:

• The assets were sold at the entity level.  Any gain or loss is determined at the entity level.  The shareholder basis has nothing to do with this transaction.
• Based on your additional facts, since the intangible was purchased previously, you are able to use the $200,000 basis when determining your gain.
• Based on bullet 2, the split in the gain noted previously still applies; so this addresses your $2 mil.
• If you still have assets on the books after the transaction, then someone needs to determine what happens next; will the S corp remain and operate with those remaining assets or will the S corp be closed down?
• Depending on the decision to bullet 4, that will require an additional set of adjustments as it is not part of your initial question regarding the sale transaction.
• The piece that you are also probably missing is that the gain passes through to the shareholder, the shareholder pays tax, the shareholder should receive a distribution (current or liquidating depends on the response to bullet 4) to cover any tax AND the shareholder basis is increased by the gain passed through on the transaction.