Sale of Business-Sole Prop.

[Bird Legs]

Client started a dry cleaning business back in the middle 1990s. They solld it in 2006.
Problem: The contract, drawn up by an attorney, includes a non compete agreement,
purchase of equipment, for a total price of $160,000. No amounts were allocated between Non compete & equip.
This is to be paid as follows: Down payment $40,000. to seller on closing date. On delivery of the Seller's properties, assets, and business to the purchaser on the Closing Date, the purchaser will execute a promissory note for $120,000. with interest at 5%.
The note is a 5 yr. note.
In 2006, seller received $40,000. down payment plus $16,148. principal on note and $4,232. interest on note.
Could some of this be allocated to Goodwill even though this is not mentioned in contract?
How much would seller allocate to Non compete aggrement?

Any help with this will be appreciated.

[Uncle Sam]

Sale of Busienss-Sole Prop.

I strongly recommend that your client get an appraisal - or at least work out with the buyer the breakdown of each class for a number of reasons.
1) Both buyer and seller must report classification of assets on their respective returns on Form 8594 - where each must disclose their respective tax ID#s.
2) You need to break down the capital gain vs ordinary income. Non compete is ordinary income-whereas the equipment is Form 4797 property.
3) The respective State involved may require a Bulk Sale Return for purposes of assessing state sales and use tax on tangible personal property.
4) Even though the deal is being financed on the installment sale basis, you need to break out the amount of income attributable to each class of asset sold.

That attorney really didn't look out for your client's best interests.

[Bird Legs]

Thank you for your response

I mentioned to my client about getting with the purchaser and working out an allocation.
Client responded that they just sold the business for $160,000.
Was hoping there would be some way to make some arbitrary allocations.
Again, thanks.

[S T]

Could you

Form 8594 I think is a mandatory filing, to be filed by both the buyer and seller and should match the dollar amounts and categories.

So could you prepare the form 8594 (Allocation of Sales Price) to the best advantage of your client and submit to the attorney for the buyer for their approval and/or revisions with a statement that that is what you are filing with the tax return. You can then do allocations to various items, such as machinery/equipment, goodwill, covenant, etc. ?

http://www.irs.gov/pub/irs-pdf/i8594.pdf

Sandy

[Bird Legs]

Sandy

Thanks for ypur response. Afraid it is too late for that.

[oceanlovin'ea]

Form 8594

I had one of my clients who had a partnership sell her business, a restaurant, a couple of months ago. I filled out the 8594 and took it to the closing. (She asked me to notarize the agreement) I went over the information with both parties and gave a copy to the buyer and one to the seller.

I told them that is was required that this form be filled out and filed by both parties in a sale of a business. I told the buyers to give their copy to their accountant so that it could be included with their tax return.

If I know they are going to sell a business or buy a business, I try to get that done right away. Saves trouble later.

Linda F

[Bird Legs]

Linda

you are correct. In this instance, however, I found out after the fact. Too late.
I did the same thing that you described, about 4 years ago where a client, dentist., sold his practice.
Thank you fr your response. It is very much appreciated.