Sale of Business

[Donanita]

Client sold their business in 07. They had original start up expenses of 8761. Reading on page sb13-6 they can take the remainder (8078) in full since the business was sold. Reading the IRS says the deduction can be taken up to the amt under irc 165. Can't find a limitation of this is the 8078 fuly deductible. Have prepared form 8594 and 4797.I am taking the inventory on 4797 as ord.inc. and taking the goolwill on sch d.Has anyone taken the inventory on 4797 and had any problems with it not being on sch c.

[Bees Knees]

In regards to your question on how to treat the sale of inventory when a business is sold, the new TTB Small Business edition has the following on page SB13-6:

Inventory—Sale of Business
Conflicting information has been published concerning the proper
treatment of inventory that is included in the sale of a group of
assets making up a business. There is no question that gain from
the sale of inventory is treated as ordinary gain and not capital
gain (see Seller’s Tax Treatment of Gain chart on page SB13-5). The
question is whether the gain is reported on From 4797, part II, as
ordinary income, or on the cost of goods sold schedule of the tax
return in which it normally would be reported had it been sold
in the ordinary course of a trade or business. The issue has to do
with whether the gain is subject to SE tax (if the business sold
was a sole proprietorship or partnership).

Report on Form 4797, part II, not subject to SE tax. Some
publications have taken the position that gain from the sale of
inventory as part of a group of assets sold that make up a trade
or business should be reported on Form 4797, part II, as ordinary
income, and that the gain is not subject to SE tax. The reasoning
being that the inventory is not sold in the ordinary course of
conducting a trade or business, but rather, it is sold as a result
of the cessation of a business activity. The same reasoning has
been used in court cases that say a covenant not to compete is a
payment for the cessation of a business and not that of a business
activity. Therefore, a covenant not to compete is not subject
to SE tax even though it is taxed as ordinary income (Milligan,
9th Cir. 1994). If you take the position that the sale of inventory
as part of the sale of a business is not the sale of inventory in
the ordinary course of conducting a trade or business, then gain
from the sale of inventory is reported on Form 4797, part II.

Report as part of the cost of goods sold calculation. Some
publications have taken the position that the sale of inventory is
subject to SE tax, even if it is included in the sales price of a business.
For one thing, the Form 4797 instructions say to report “the
disposition of noncapital assets (other than inventory or property
held primarily for sale to customers in the ordinary course
of your trade or business).” Code section 1402(a)(3) says “there
shall be excluded any gain or loss…(C) from the sale, exchange,
involuntary conversion, or other disposition of property if such
property is neither (i) stock in trade or other property of a kind
which would properly be includible in inventory if on hand at the
close of the taxable year, nor (ii) property held primarily for sale
to customers in the ordinary course of the trade or business.”

In other words, if the property was not sold during the year,
where would it be? If it would be included in inventory, then the
sale of it during the year is not excluded from SE tax treatment.
There is no exception that says, “unless it is sold as part of the
sale of a business.” Therefore, under the language in the code, any
kind of property that would be included in inventory at the end
of the year if it were not sold is subject to SE
tax if it is in fact sold. For this reason, then the
gain from the sale of inventory as part of the
sale of a business should be reported on
the cost of goods sold section of the tax
return, subject to SE tax if the taxpayer
is self employed. (Part III of Schedule C,
Schedule A of form 1065, etc.)

[Bees Knees]

Keep in mind the two contradicting positions that are mentioned in TTB Small Business edition are mentioned as two opposing opinions. There is no specific guidance that clearly says the sale of inventory when it is sold as part of the sale of a business should be reported as cost of goods sold, or on Form 4797. TTB is explaining both conflicting arguments without coming right out and saying which one is correct.

You have to decide which one you think sounds right.

[Donanita]

Thanks Brad

Am I right to take the amortization deduction in full for this year and is this reported on sch c as the previous deduction was taken

[Bees Knees]

Yes.

TTB page SB 13-6 also says:

Amortization of start-up expenses. If the business
is still amortizing start-up expenses when it is
liquidated, any remaining amortization when
the business is sold is deductible in full in the
year of sale. [IRC §195(b)(2)]

Take the deduction on Schedule C.