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Business sale income and expense filing.

FTPhil
Level 3

I have 2 clients, a father and son. They own and run a small information business in the father's home. In the end of 2020 the son bought out the father's share of the business. The terms of the sale are as follows; $200,000 sale price 20% flat rate simple interest = $240,000 to be paid over 10 years. There is no "physical property" involved in the sale, the son is still going to use the father's home as the office and all computers etc. where included in the sale agreement. Both have always reported the income on Schedule C.

The question's...

Where does the income get reported on the father's tax return?

Where does the expense get reported on the son's tax return?

What forms need to be filed with the IRS and by whom?

Thanks!

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19 Replies 19
linette
Level 5

You state no physical property and then also state computers etc.

Look up sale of business intellectual property (specifically goodwill) and see what you find and what you believe to be the case with this deal.  This should tell you where to report it.

 

sjrcpa
Level 15

There is no "physical property" involved in the sale

all computers etc. where included in the sale agreement

Computers are physical property.

This is a sale of  business assets by the father. Both parties should agree on  the breakdown of the sales price into categories such as:

Fixed Assets

Accounts Receivable

Goodwill

Accounts payable assumed

Etc. They each complete Form 8594(?)

Then the sale of each one gets reported appropriately-Sch C, Form 4797, Sch D/8949.

 


ex-AllStar
FTPhil
Level 3

This can be deemed as Class VII - "Goodwill", I'm good with that and so are they. The father's income is taken care of with the 8594 and 4797. The son also completes the 8594, but where does he recoup the expense of buying the business? He is paying the father $2000 a month of which $400 is interest. The 4797 is for income, not expense. Also, does the son need to give the father anything other than a 1099-INT?

Thanks again!

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qbteachmt
Level 15

"where does he recoup the expense of buying the business?"

Well, that's not Expense. That is the difference between expense and investment, or Asset. Goodwill is an intangible Asset, to be amortized per the regulations that apply.

"He is paying the father $2000 a month of which $400 is interest."

That's the debt amortization; not the Goodwill.

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sjrcpa
Level 15

Generally,  goodwill purchased as part of the purchase of a business is an amortizable (over 15 years) asset. Here I would research whether self created or related party rules preclude that.


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FTPhil
Level 3

The son has a BILL of Sale for $200,000 + $40,000 Interest, it will be paid off over 10 years. I can show all of that income for the father with the 4797. Where can I show the expense for the son? He is paying it monthly, $1,600 principal and $400 Interest. I believe that the 4797 on the father's return negates the need for the son to give him a 1099INT, but how does the son get to show the money he is paying? 

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qbteachmt
Level 15

Of course the father has income; he "sold nothing for something" when it comes to Goodwill. The son has the Amortization = a "useful life" per IRS regulations for taking a bit of the cost each year. It isn't Expense the way paying for electricity or rent is expense; think of it as Allowance. The son is Allowed to write off a bit of the cost each year, until the value of the intangible asset is considered fully expensed. The same is true of that equipment. The son Invested in tangible goods that have a useful life per the IRS, and that "wears out over time" and that is why there can be Depreciation Expense = a little bit each year.

Think of a building; it isn't all gone when you buy it for $250,000. It's right there and has a Useful life. But the IRS acknowledges there is wear and tear over time. That is Depreciation of this tangible asset.

And the son has Debt. Servicing that debt will require payments. That is not Expense. That is paying off debt. That is Liability, not expense. but the cost of being in debt, which = Interest, would be expense. Unless it is prohibited due to specific or certain rules, such as, you cannot be in debt to yourself. That's why @sjrcpa has added that comment.

This might be an event you need to be mentored on.

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linette
Level 5

If he were paying interest to buy a car would he deduct it?

Determining what was purchased and who purchased it determines where it is reported if it is reportable at all.

Personal interest is not deductible even though it is income to the person receiving it.

sjrcpa
Level 15

This might be investment interest or business interest.


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FTPhil
Level 3

Maybe this is getting confused by the Class VII - Goodwill classification... Maybe the "asset" should be considered a Class VI - Intangible. There was no consideration to the "physical" items involved in the business as those items would go naturally via inheritance, the father is no longer involved with the business, so the son is just "buying" the "fees". There are no goods sold, just opinions that are paid for via fees. There really isn't anything to amortize. It's set up more like a mortgage/loan that the father has financed, but a 1098 wont work (I don't think), because there is no "property". 

Sorry to be a bother, but I want all parties to get what they deserve, and I can't figure out how to show that the son is spending the money, and thus write off the expense.

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qbteachmt
Level 15

This is a bit of sad info: "There was no consideration to the "physical" items involved in the business as those items would go naturally via inheritance"

Because the point of "being in business" would be to sell Assets at a reasonable price, first. Intangible assets are sort of "the left over valuation" and that's where Goodwill comes from.

You should leverage what matters in the tax code. You mentioned this was left-over computers, which would be taken out of service long before Goodwill is fully amortized.

Which is why we get Mentored on business buyouts.

"the father is no longer involved with the business, so the son is just "buying" the "fees"."

Yep; that is "buying nothing for something."

"There are no goods sold, just opinions that are paid for via fees. There really isn't anything to amortize."

Well, now you are learning that isn't true.

"It's set up more like a mortgage/loan that the father has financed, but a 1098 wont work (I don't think), because there is no "property"."

You are learning something new.

"Sorry to be a bother, but I want all parties to get what they deserve, and I can't figure out how to show that the son is spending the money, and thus write off the expense."

It's not Expense. I don't know more ways to explain this part.

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FTPhil
Level 3

Ok qbTEACHmt, I get it, the purchase of a "business" has to be amortized. You still have not answered the question... How does it get reported on the son's tax return so he isn't out $24,000 a year with NOTHING to show for it?

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linette
Level 5

Try a depreciation schedule and don't be rude.

People are trying to guide you an area where you don't have knowledge.  You shouldn't expect this forum to teach you tax law, accounting and return reporting.

sjrcpa
Level 15

He's got the business he purchased to show for it.


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linette
Level 5

Let me ask you,  How are you reporting the income on Dad's return?

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FTPhil
Level 3

I haven't even begun to be rude, quite frankly, I have been quite civil in my attempt to find out what forms I need to file for these 2 clients.

The father (seller) will file on Form 6252 & 8594 as I was told in the beginning of this chat torture.

Since then there has been nothing but "teachable" moments with no resolution. Don't get me wrong, I love that I am being taught things, learning is good. This however, for me will be a one time thing that I will never get involved in again, and I just need some helpful advice...

I can show the Amortization on Form 4562 Part III Line 19e Using "MM" and "S/L"  in column e & f, (not sure if those are correct or not, but they fill in the space without errors), which flows the "Depreciation deduction" (that I have been looking for the whole time), onto the Scd C. Perfect!

Now on to the other yet unanswered question... How do I show the Interest Expense on the son's return? The father gets the Interest Income via the 1099-INT that the son gave him, that's easy. How does the son write off this expense?

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linette
Level 5

What I tried to say to you in the beginning and others are leading to in their responses.

Buying and Selling Businesses is not something you should get involved with once.

You don't state why this is only time you will do this, but my suggestion might be not to do in once.  Then you don't have to learn.

This is a coaching moment for a professional (teaching client) and you as a professional can be held responsible for what is put on the returns.  You have basis determination for Dad.  Basis determinationf or Son.  Interest Income and Interest Expense in each year.  And, you have a related party transaction.

Potentially a rental agreement in the future.

Lots of things for which you can be lead astray.  

Get advice and advising your client appropriately should be top priority.  Not figuring out what line on the tax return it goes on.

We all face these things in our daily business.  I am not willing to provide that advice and the pitfalls in this forum.

qbteachmt
Level 15

"so he isn't out $24,000 a year with NOTHING to show for it?"

Your components are going to include Interest expense, debt service (not expense), amortization (expense) and depreciation (if any; is expense).

"This however, for me will be a one time thing that I will never get involved in again"

We don't need you to be grateful; but this is Not your first time, and we are glad to help you, again.

You were the person trying to pay yourself for your Sole Proprietorship activity through payroll. It was quite a discussion. If you don't think you are learning anything, you should stop asking. If you intend, as you previously indicated, to help your clients, then you need to be learning this, taking CE, studying regulations and changes, and follow up when someone tries to point you to the right resources.

"not sure if those are correct or not, but they fill in the space without errors)"

Asking peers users about the program's functionality when you already know what you need to report is different than not even knowing what to call something per the IRS regulations that apply. Sure, you can plug numbers in somewhere, but are you doing a disservice to your client? For instance, it isn't clear if you are treating the payments as installment plan.

And someone overlooked getting guidance on this "sale" because the ability to pay Rent, not debt service, would have made the monthly payments an Expense. That's why business buy/sells require good planning.

"Now on to the other yet unanswered question... How do I show the Interest Expense on the son's return? The father gets the Interest Income via the 1099-INT that the son gave him, that's easy. How does the son write off this expense?"

@linettereally stated this nicely: "We all face these things in our daily business. I am not willing to provide that advice and the pitfalls in this forum."

This is not the place for "teach me to do taxes." This is peer users that are already staying current with their continuing education and update requirements, trying to use common software, and struggling with the same software, and questions for how to interpret some tax regulation that isn't clear or hasn't even been finalized by Congress. Although we are glad to Point you in the right direction, you need to learn these things yourself, off this forum, by proper studying, classwork, mentoring.

So, go to www.irs.com and look up "who must file 1099-INT" as a place to start.

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qbteachmt
Level 15

"Where does the expense get reported on the son's tax return?"

Make sure you understand the differences between the assets, liabilities, the interest, and anything that is actually expense. Cash Flow isn't always expense.

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