Client purchased a barber shop business, including equipment & supplies, in October 2012 and signed contract of sale at that time. Client open doors for business immediately after signing contract. Contract contained a clause that allowed buyer to pay in full after January 1, 2013 (seller did not want to be paid until 2013). Check was dated 1/2/2013. Since the contract documented committment to pay, I'm assuming that income & expenses, etc., including cost of purchase, can be attributed to 2012 tax return. Comments?
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Seller wanted to be paid in 2013 because he did not want to report sale in 2012. IRS is not going to allow having it both ways, with buyer claiming in 2012 and seller claiming in 2013. The possibility of installment sale treatment comes to mind, however, so I would suggest further research in this regard. It would have been better if there had been some kind of down payment. -
My assumption would be the buyer bought the business via an installment sales agreement when the deal was signed and he opened shop. They incurred a debt for the balance due and would be able to capitalize and start depreciation as of the date they opened. The same way people borrow money for a rental house start depreciation when they have it ready to be rented, not after the mortgage is paid off.
The seller may be cash basis and would be able putting off the income to the next year thru an installment sale contract. It would not matter to the buyer what the seller did other than if there was an interest element of the payment, which would have to be accounted for the same way by both parties.
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As always this my opinion and not to followed without your own researchComment
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Don't forget a Form 8594, Asset Acquisition Statement, should be filed by both seller and buyer on their tax returns.Comment
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Based on what you post, it appears the seller had constructive receipt of the money in 2012. Certainly, your taxpayer has operating income & expenses to report for 2012 but the Tax Court might not agree that there are deductions in 2012 for the purchase of the business since payment occurred in 2013???Originally posted by RayT View Post
A snip from TCM 1999-242
While a cash basis taxpayer must include in income amounts actually or constructively received
during the year, see sec. 451 and sec. 1.451-1, Income Tax Regs., there is no such provision for constructive payment. It is now horn-book law that "constructive payment" is not a necessary corollary of "constructive receipt," and what may be income to one may not be a deductible payment by the other.Comment
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If installment sale would work
...then imputed interest might rear its ugly head also.Originally posted by ToledoEd View Post
FEComment
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It would definitely rear its ugly head. See Pub 537. If no provision were made in the contract for such interest, then it would have to be imputed and the sales price adjusted downward to accommodate it. That would affect both parties and the figures on 8594 which they will use on their tax returns. Form 8594 is required to be filed with both tax returns "in the tax year the sale date occurred." That's going to be difficult to explain for the seller if he files the form on 2012 and shows no gain (or loss). And for installment sale to qualify it has to be a gain. Assuming no down payment was made, the IRS could look askance at the way it is structured. It is also not clear from OP whether the sale involved a building. If real estate was involved and there was a gain due to depreciation, then unrecaptured 1250 gain might also come into play in 2012.Last edited by Burke; 01-16-2013, 04:23 PM.Comment
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