Reporting Sale of Business

[quicksam]

I have a single owner Pest Control Company(Schedule C) that decided to sell his business on Sept 1st of 2014. He really did not have any assets. Just a couple hand held sprayers and a few chemicals. In 2010, he bought a new truck, which he received Bonus depreciation that year. I believe the bonus depreciation is going to be more at this time than the normal depreciation would have been, so I know we will be recapturing some depreciation. The truck was not part of the sale, but business use will be dropping below 50 percent.

Now for how the sale was structured:

He received $3,500 down, and then .85 cents on every dollar for 12 months. He was required to stay on for 90 days to answer customer calls and to go to customers homes on first appointment with new owner. He did not receive any additional compensation for this 90 day agreement.

I am looking for ideas on how y'all would report this transaction on the tax return. Would you do the first three months different since he is still engaged in the work? Or would you just report it all the same?

Thanks

[Roland Slugg]

What did he sell? Did the buyer and seller agree on what was bought and sold and assign values to each item? If so, the seller should use the value(s) assigned to each asset sold. If it was all for "goodwill," that would qualify for capital gain treatment. If some of the selling price was allocated to the sprayers and chemicals, that portion would give rise to ordinary income and/or §1245 recapture.

From your description, however, it sounds like the seller just sold the right to take over the business name on a percentage payout (plus a modest down payment). If so, and if the buy/sell agreement didn't allocate any portion of the selling price to specific assets, I believe I would report all payments received as royalties on Schedule E.

[Gretel]

Truck

I he keeps the truck there is no recapture for depreciation since it wasn't Sec.179 depreciation. If he sells the vehicle that is a different story.

[Roland Slugg]

... there is no recapture for depreciation since it wasn't Sec.179 depreciation.

That would be correct for most depreciable assets. Most vehicles, however, are "listed" property, and there are special rules applying to such property. Unless the truck referred to in the OP is one that would not be suitable for personal use, it is "listed" property, and recapture will apply when converted to personal use. (Code §280F(b)(2)(B))