Tax Forms Used When Selling a Business
The following tax forms are typically used when selling a business:
- Form 8594, Asset Acquisition Statement
- Form 4797, Sales of Business Property
- Schedule D, Capital Gains and Losses
- Form 6252, Installment Sale Income
Form 8594 is used to report the sale and purchase of a group of assets that constitute a business. On Form 8594 the total selling price of the business is allocated to the various asset classes transferred in the sale. The residual method is used to allocate the total selling price among the various asset classes.
Seven Asset Classes:
There are seven asset classes indicated on Form 8594. Both the seller and purchaser must each file Form 8594 with the IRS to report :
- The purchaser's depreciable basis in the assets transferred, and
- How the seller determined gain or loss.
The values entered on the seller's and purchaser's copy of Form 8594 must be identical.
Form 4797 is used to determine gains and losses on the sale of business property.
- Section 1231 losses for each property are entered in Part I, line 2.
- Section 1231 gains for each property are entered in Part III, line 19.
- Part II is used to report ordinary gains and losses for certain items.
If you have more properties than the form can accommodate, use additional forms. Once you enter the losses and gains in the appropriate parts of Form 4797, follow the instructions printed on the form to see how to report gains and losses.
Schedule D is generally used to report long-term and short-term capital gains and losses on the sale of securities (e.g., stocks and bonds). However, a net gain on section 1231 assets from Form 4797 is also entered on Schedule D as a long-term capital gain.
Is Form 8949 Used to Report a Section 1231 Gain?
A Section 1231 gain is reported on Form 4797, Sales of Business Property and on Schedule D, Capital Gains and Losses. Note that even though Section 1231 assets are not classified as capital assets (they are non-capital assets), a Section 1231 gain is reported as a long-term capital gain on Schedule D..
Form 8949, Sales and Other Dispositions of Capital Assets is a relatively new form that was introduced by the IRS in 2011. Before 2011, capital gains and losses on the disposal of capital assets (i.e. stock and bonds) were reported directly on Schedule D. Now, gains and losses on capital assets are reported on both Form 8949 and Schedule D. The totals on Form 8949 are carried to Schedule D.
Section 1231 property includes real and depreciable business property held more than one year at the time of disposal (i.e. machinery, equipment, furniture, and fixtures). Depreciable business assets are not classified as capital assets; they are non-capital assets..
Despite the fact that Section 1231 assets are non-capital assets, special tax treatment under IRC section1231 allows a net Section 1231 gain on the disposition of a Section 1231 asset to be reported on Schedule D as a long-term capital gain, and a net Section 1231 loss to be reported as an ordinary loss rather than a capital loss.
This means, a net Section 1231 gain receives favorable capital gains treatment, and a net Section 1231 loss is fully deductible as an ordinary loss in the year incurred, rather than being subject to the annual $3,000 deduction limit applicable to net capital losses.
If you receive one or more payments from the sale of your business in the year following the year of sale, it is an installment sale and Form 6252 must be filed.
Keep in mind, recaptured depreciation for all related property sold, (including the first year expensing deduction) must be reported in the year of sale as ordinary income even if you receive no payment until the following year.
Form 4797 is used to figure depreciation recapture. Any gain in excess of recapture income on Form 6252 is reported under the installment method.
- Return to the Selling a Business Table of Contents to find related links.