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Sole Prop gives small carpentry business to son and son inlaw. How do you account for sale when receiving $2000 month from related party?

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Level 1
The related parties formed a partnership, therefore what was agreed to be paid for purchase would be their starting basis of new company.
Do you take into account original basis would be the positive taxable income that was generated over the years as a starting basis before sale?
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14 Replies 14
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Level 15

Sounds more like he sold, than gave.  What exactly did he sell?

ex-AllStar, ex-Lutefisk taste taster, ex-ACME product tester
and ex marks the spot where those rocks and anvils hit me.
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Level 1

Father (sole prop - sch C ) sold client list to son and son in law whom formed a partnership agreement.

Changed name of company, and is now paying Father $2000 month based on agreed sale price. I do not know what the selling price is yet, meeting next week to discuss. 

So do I sell his Sch C business on form 4797 or do installment sale? 

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Level 15

Let's see if I understand = "gives small carpentry business" and receives $2,000 per month in exchange for this gift, and "agreed to be paid for purchase would be their starting basis of new company."

I think you might start by clarifying some of the terms used in your question. https://www.thetaxadviser.com/issues/2014/apr/casestudy-apr2014-vm.html may help you to organize what you think might be the case and  present it back here.

 


ex-AllStar
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Level 1

He sold the client list for construction work to son and son in law. 

How can he gift it when they agreed to a selling price of business paying him $2000 month. How is that income treated on tax return or not at all?

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Level 15

Gifts don't come with a price tag of $2000/month.  Sounds like you have a taxable sale of the customer list.

ex-AllStar, ex-Lutefisk taste taster, ex-ACME product tester
and ex marks the spot where those rocks and anvils hit me.
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Level 1

I agree. Just trying to avoid high tax bill. My consensus would be to put it on installment sale, based on possible calculation of his original basis.

Again, if he did not keep track of taxable income on SCH C, can we go back to all SCH C net income and add that up for his original cost basis, against the monthly income?

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Level 15

If he sold a client list, most likely he doesn't have any basis on the sale.  Or did he sell more than the client list?  What about the other business assets?

ex-AllStar, ex-Lutefisk taste taster, ex-ACME product tester
and ex marks the spot where those rocks and anvils hit me.
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Level 1

No the guys have their own trucks and tools

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Level 7

Would not the total purchase price be treated as a Section 197 intangible  amortizable over 15 years?? Just asking.

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Level 1
What I am looking for is what is the best way to treat the $2000 monthly income paid to father on his personal tax return. I don’t want to complicate this.
The son and partner do the business now as a new business, default to partnership. So the monies being paid to related party should be their capital investment basis, am I wrong here?
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Level 1
Thank you everyone for feedback.
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Level 15

@Anglis wrote:
What I am looking for is what is the best way to treat the $2000 monthly income paid to father on his personal tax return. I don’t want to complicate this.
The son and partner do the business now as a new business, default to partnership. So the monies being paid to related party should be their capital investment basis, am I wrong here?

Are they paying $2000 monthly until somebody dies?  You need to determine what the actual selling price is to calculate the gain.  On the flip side, the payments aren't a capital investment.  The debit side of the transaction is an asset (client list) and the credit side is a note payable.  The monthly payment is purely a debt payment consisting of principal and interest.

ex-AllStar, ex-Lutefisk taste taster, ex-ACME product tester
and ex marks the spot where those rocks and anvils hit me.
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Level 1
I know he agreed to a figure. Maybe $50,000
I will get more info this coming week.
So then the son and partner will not have a capital basis. So on the partnership side they can write that off as a debt noted payable.
Thank you.
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Level 15

Actually, they write of the cost of the client list by way of amortization every year along with the interest they pay on the note.

ex-AllStar, ex-Lutefisk taste taster, ex-ACME product tester
and ex marks the spot where those rocks and anvils hit me.
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