When a client is ready to sell their business, your professional tax guidance can make or break the outcome. Understanding the structure of the transaction and proactively identifying planning opportunities ensures your client is positioned to walk away with optimal after-tax proceeds.
Below, you’ll find a few of the top questions and answers from a recent webinar on the topic. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.
Q: How is the sale of a sole proprietorship taxed?
A: Sole proprietorship sales are treated as the sale of the business’s assets (an asset sale), taxing each asset based on its character. Inventory is reported as ordinary income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Depreciable assets go on Form 4797, Sales of Business Property, and may trigger depreciation recapture. Goodwill is generally a capital asset. Both parties usually file Form 8594, Asset Acquisition Statement Under Section 1060, to allocate the purchase price.
Q: How is goodwill taxed when selling a business?
A: Goodwill is generally treated as a capital asset, resulting in long-term capital gain if held for over one year. If amortization was taken, recapture rules may apply, creating ordinary income. Entity-owned goodwill is reported on Form 4797. If personal goodwill exists, the seller may report it directly on Form 8949, Sales and Other Dispositions of Capital Assets, which flows to Schedule D (Form 1040), Capital Gains and Losses.
For a deeper dive into goodwill treatment in S corporation sales, see our article What Happens When an S Corporation Is Sold? from TAXPRO Monthly, August 2024.
Q: What’s the tax difference between asset and stock sales?
A: In an asset sale, each asset is taxed separately based on its type, and depreciation recapture may apply. Buyers benefit because they can assign the purchase price to the individual assets acquired, increasing their basis and enabling larger depreciation deductions in the future. In a stock sale, the buyer purchases ownership in the entity (the stock), and the company continues to own its assets with no change in basis or depreciation schedules. Stock sales usually result in capital gains for the seller and are often preferred by the seller for favorable tax treatment.
Q: Can the installment method be used when selling a business?
A: Yes, but only for eligible assets. Inventory, accounts receivable and depreciation recapture must be reported as ordinary income in the year of sale. Capital assets like equipment, buildings or goodwill may qualify for installment reporting. Use Form 6252, Installment Sale Income, to report installment income for those eligible assets.
To learn more about the tax implications of selling a business, watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.
The National Association of Tax Professionals (NATP) is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers.
The NATP headquarters is located in Appleton, WI. To learn more, visit www.natptax.com.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing.