Probably dumb depreciation question II

[AZ-Tax]

In 2008 my client sold his restaurant business (not building for client never owned building) for $170K. The cost basis ln 8 part 1 of form 6252 is $225K. Ln 5 of form 6252 is $170K. His only assets purchased were in 2007 when he started the business which was $51233 all taken in 07 which is included in the $225K cost. That is a loss of ($55K). I asked him what the FMV of those $51233 of assets were at time of sale and he said $30K. That $30K was recaptured on is 2008 tax return as form 4797 income. For the time he owned the business in 2008, he lost ($62K) which was deducted on his 2008 tax return Ln 12 form 1040. Ok, he had a ($55K) loss on the sale, depreciation recapture $30K (income). Doesn’t that leave another ($25K) of loss from business sale and if so why didn’t that deduct on his 2008 tax return? No Sch D was generated. He sold his business on installments with $4400 payment received in 08 and $9900 payment received in 09. No interest with the installment sale. Are the installment payments non taxable until he accumulates $25K of installment payments?

[BOB W]

In 2008 my client sold his restaurant business (not building for client never owned building) for $170K. The cost basis ln 8 part 1 of form 6252 is $225K. Ln 5 of form 6252 is $170K. His only assets purchased were in 2007 when he started the business which was $51233 all taken in 07 which is included in the $225K cost. That is a loss of ($55K). I asked him what the FMV of those $51233 of assets were at time of sale and he said $30K. That $30K was recaptured on is 2008 tax return as form 4797 income. For the time he owned the business in 2008, he lost ($62K) which was deducted on his 2008 tax return Ln 12 form 1040. Ok, he had a ($55K) loss on the sale, depreciation recapture $30K (income). Doesn’t that leave another ($25K) of loss from business sale and if so why didn’t that deduct on his 2008 tax return? No Sch D was generated. He sold his business on installments with $4400 payment received in 08 and $9900 payment received in 09. No interest with the installment sale. Are the installment payments non taxable until he accumulates $25K of installment payments?

What type of entity are you talking about?

[AZ-Tax]

Entity is an single LLC member filed on a Sch C

Entitiy is an single member LLC filed on a Sch C

[BOB W]

You need to recheck form 6252 for the proper info placed on it. Second, there is no such thing as an interest free installment sale. Interest needs to be imputed, causing the sale price to be reduced down.

Google "Imputed Interest". Any basis needs to be entered on the 6252. This developes a % of the proceeds that is gain. All payments need to be reported annually. There is no such thing as excluding the first of anything.

It look like this installment sale needs to be reworked in order to complete the 6252.

[Maribeth]

Let me see if I have this right:

Your client purchased his business in 2007 for $225K, which included $51233 in depreciable assets which were all §179'd in 2007..

He sold his business in 2008 for $170K. Of that amount, $30,000 was for the equipment and $140,000 was for something else.

This is a new client for you, you did not prepare his 2008 return.

On the 2008 return, what should have been shown is:

Sale of equipment - $30,000 minus basis of $51,233 plus A/D of $51,233 = $30,000 gain on Form 4797, all ordinary income.

Sale of other - $140,000 minus basis of $173,767 = $33,767 loss. I do not know where on the return the loss of $33,767 should have been reported because I am unsure as to the nature of the remaining assets that were sold. If they were supplies & inventory, the loss would be ordinary; if they were goodwill, the loss would be capital.

Two more points: you do not report a loss on a 6252. Also, as BobW has indicated, there is no such thing as a non-interest bearing loan. You must impute the interest on every payment received and report the income accordingly. And also as BobW has indicated, you may have to go back and crunch the numbers again on this sale and perhaps amend the 2008 return.

hth,

Maribeth

[AZ-Tax]

Maribeth.....

My client started his business in 2007 with his own money to pay for help, inventory, rent, utilities, payroll, equipment (assets) etc. He is a single member LLC and we filed a Sch C for his business. Regarding his assets, he purchased $51233 of them in 2007 and sec 179 them all in 2007. I prepared his 2007 tax return. In 2008, for the part of the year he owned the business, he lost $62K. Later in 2008 he sold the business for $170K which included his assets. At time of sale he said his $51233 of assets FMV was $30K. His cost basis was $225K which included his $51233 of assets.

[Maribeth]

My client started his business in 2007 with his own money to pay for help, inventory, rent, utilities, payroll, equipment (assets) etc. He is a single member LLC and we filed a Sch C for his business. Regarding his assets, he purchased $51233 of them in 2007 and sec 179 them all in 2007. I prepared his 2007 tax return. In 2008, for the part of the year he owned the business, he lost $62K. Later in 2008 he sold the business for $170K which included his assets. At time of sale he said his $51233 of assets FMV was $30K. His cost basis was $225K which included his $51233 of assets.

I am sorry to be so dense but I still am unsure what his cost basis is comprised of. Is it the amount of his capital account? Are there hard assets that support that basis?

Maribeth

[S T]

I am so confused

If your client started the business in 2007 and purchased $ 51,233 in depreciable assets which were all Sect 179 expensed in 2007 -

My client started his business in 2007 with his own money to pay for help, inventory, rent, utilities, payroll, equipment (assets) etc. He is a single member LLC and we filed a Sch C for his business. Regarding his assets, he purchased $51233 of them in 2007 and sec 179 them all in 2007. I prepared his 2007 tax return

Where does the $225,000 come into to play for the Cost Basis of the Business? There should be other Assets for $ 173,767 depreciable, amortizable or not? Some of these could have been Start Up Costs or Organization Expenses, some might have been just regular business expenses for the first few months of operation.

Please provide a more accurate breakdown of the Costs of either Purchase or Start Up (you will need to define) in 2007

Sandy

[AZ-Tax]

My apologies, my mistake

If I would have just reserached fully what happen in the first place, I may have avoided most of this. My client did NOT launch his business, he purchased the business from someone. I think I may have it resolved. If not I will be back.

Thanks for all your help fellow practioners.