Inventory Question

[rfk]

A question about inventory and its treatment because of sale of business:

Begining Inv was ~ $47,471, ending of 12/31/2004.

Business sold 01/07/2005 where no value was placed on inventory, but only goodwill.

Franchisor inventoried as business was sold, and cut check to my client -- Franchisor ended up giving my client $32,231, a value less than was actually inventoried (took away other incidental costs). So what I did was run it through the Schedule C as ending inventory for the close of business ending inventory value. B'ing (12/31/2004) value was $47,471 and ending value was $32,231 via the Franchisor value.

According to my client, a franchisee never really owns anything in the store, they just manage the it. However, I guess inventory is an integral part of the client's cost, and the franchisor ends of paying for the remaining value once the business is sold, etc.?

Am I right to presume running the inventory through the Schedule C, and not Form 4797?

Thank you

Ray

[Bees Knees]

I think the difference between running inventory through Schedule C and not the 4797 when the business is sold is that any gain on its sale will wind up being subject to SE tax. The Schedule C profit is subject to SE tax. The gain from 4797 is not. The reverse is also true: If you have a loss on selling the inventory, the loss reduces SE tax by reporting it on the Schedule C, whereas a loss reported on the 4797 will not.

I think IRS probably does not care when you run it through Schedule C as long as it is helping to increase SE tax and not the reverse.

TTB, page 25-3 has a chart on the seller's and purchaser's tax treatment of assets when a business is sold. Inventory is taxed to the seller as ordinary income. It does not mention the SE tax aspects of the deal.