Selling Your Business

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Tax Forms Used When Selling a Business

The following tax forms are typically used when selling a business:

  1. Form 8594, Asset Acquisition Statement
  2. Form 4797, Sales of Business Property
  3. Form 1040 Schedule D, Capital Gains and Losses
  4. Form 6252, Installment Sale Income

1) 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 using the residual method.

There are seven asset classes indicated on Form 8594.

The seller and purchaser must file Form 8594 with the IRS in order for the IRS to know:

  1. The purchaser's depreciable basis in the assets transferred, and
  2. How the seller determined gain or loss.

Both the purchaser and seller file Form 8594 with their own annual individual income tax return.

The values entered on the seller's and purchaser's copy of Form 8594 must be identical.

2) Form 4797 is used to determine gains and losses on the sale of business property.

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.

3) 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). In addition, a net gain on Section 1231 assets from Form 4797 is generally entered on Schedule D as a long-term capital gain.

UPDATE for Tax Year 2011 and beyond - New IRS Form 8949:

Form 8949, Sales and Other Dispositions of Capital Assets was introduced in 2011. Before 2011, capital gains and losses were reported directly on Schedule D. Now, these gains and losses must be reported on Form 8949 and the totals from this form are carried to Schedule D.

Section 1231 long-term gain:

Form 8949 is used to report gains and losses on securities transactions, such as stocks and bonds. You don't have to file Form 8949 if your only capital gain was a section 1231 long-term capital gain. This is because such gain is reported on another form, Form 4797, Part I. But you do file Schedule D if you have a section 1231 long-term gain, because a section 1231 gain that is reported on Form 4797 must be carried to Schedule D.

In prior years, gains and losses on the sale capital assets (i.e. stocks and bonds) were were reported directly on Schedule D. Now, you must first complete Form 8949, where you list short-term and long-term gains and losses, and then carry the totals to Schedule D.

Purpose of Form 8949:

The reason for Form 8949 is that, the IRS is having borkers report the cost or other basis (your cost) of the securities being sold on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions (or substitute statement), which brokers send to clients annually. You list these transactions on Form 8949.

If the cost or other basis of the securities being sold is not reported on Form 1099-B, in other words, box 3 is blank, you must use a separate Forms 8949 to list these transactions.

If you receive a substitute statement reporting multiple transactions (instead of a Form 1099-B for each indiviudal transaction), the broker will indicate on the substitute statement whether basis was reported to the IRS or was not reported to the IRS.

In any event, you complete a separate Form 8949 listing transactions where basis was reported and another Form 8949 listing transaction where basis was not reported.

In addition, you must file a separate Form 8949 to report gains and losses that were not reported to you on Form 1099-B.

This means, you may have to complete three separate Forms 8949 to separately list transactions for each of the three situations - basis reported on 1099-B (or substitute statement), basis not reported on 1099-B (or substitute statement), gains and losses not reported on 1099-B.

Example:

You receive Form 1099-B substitiute statement showing three transactions:

  • A Short-term gain with basis reported
  • A Long-term gain with basis reported
  • A long-term loss with basis not reported

For these transactions you need two Forms 8949: one to report the two transactions with basis reported by the broker to the IRS. And a second Form 8949 to report the transaction where no basis was reported to the IRS.

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Reminder:

  • Capital assets are assets used for personal purposes, pleasure, and investment. For example, stocks, bonds, your stamp collection, your house and car are all capital assets.

Section 1231 deals the sale of non-capital assets (business property). Consequently, Form 8949 does not apply to Section 1231 transactions.

  • Section 1231 property includes, depreciable real property (an office building), depreciable personal property (machinery, equipment, furniture and fixtures), and land used in a trade or business (a parking lot).

Form 6252

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, (including the first year expensing deduction, also called the Section 179 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.