Selling a Group of Assets

The sale of a sole proprietorship is not the sale of a single asset; it is the sale of a group of assets that make up the business.

For tax purposes, each asset in the group is treated as being sold separately. Gain and loss for each asset is computed separately.

Section 1231

Real or depreciable business property held over one year before being sold are subject to special tax treatment under section 1231.

  • Form 4797 is used to report sales of business property.
    • The seller files Form 4797.
  • Form 8594 is used to allocate the selling price to property transferred to the buyer and to report the sale and purchase of a business to the IRS.
    • Both the seller and buyer of the business must file Form 8594 with their annual income tax return.

When Does a Group of Assets Constitute a Trade or Business?

A group of assets constitutes a trade or business if either of the following applies:

  • Goodwill or going concern value could, under any circumstances, attach to the assets.
  • The use of the assets would constitute an active trade or business under Section 355 of the Internal Revenue Code.
    • Section 355 deals with the distribution of stock and securities of a controlled corporation.

Goodwill

Goodwill is associated with a company's good reputation in terms of the products it sells, the services it performs, and it's standing in the community. It is tied to the ability of a business to continue doing business with its existing customers and to attract future customers.

Goodwill is an intangible asset that may only be acquired as part of the acquisition of a business. It is a section 197 intangible whose value is amortized over 15 years by the purchaser of a business.

Goodwill generally represents the excess of the price paid for a business over its net asset value (also called book value).

Going-concern Value

Going-concern value is the value attributed to a business entity as an on-going enterprise. Going-concern value focuses mainly on the ability of the company's assets to generate a return on investment not simply goodwill.


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