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Page 9 of 20 Fileid: … tions/p537/2022/a/xml/cycle06/source 5:36 - 5-Dec-2022
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
year of sale between each of the following at least annually for federal income tax for $120,000. The note payments are $15,000
classes of assets. purposes. However, see Regulations sec- each, plus 10% interest, due every July 1 and
1. Assets sold at a loss. tion 1.338-6(b)(2)(iii) for exceptions that January 1, beginning in 2023. The total selling
apply to debt instruments issued by per- price is $220,000. Your selling expenses are
2. Real and personal property eligible for the sons related to a target corporation, con- $11,000.
installment method. tingent debt instruments, and debt instru-
3. Real and personal property ineligible for ments convertible into stock or other The selling expenses are divided among all
the installment method, including: property. the assets sold, including inventory. Your sell-
ing expense for each asset is 5% of the asset's
a. Inventory, 3. Property of a kind that would properly be selling price ($11,000 selling expense ÷
included in inventory if on hand at the end $220,000 total selling price).
b. Dealer property, and of the tax year or property held by the tax-
c. Stocks and securities. payer primarily for sale to customers in the The FMV, adjusted basis, and depreciation
ordinary course of business. claimed on each asset sold are as follows.
Inventory. The sale of inventories of personal 4. All other assets except section 197 intan-
property can’t be reported on the installment gibles. Depre-
method. All gain or loss on their sale must be ciation Adj.
reported in the year of sale, even if you receive 5. Section 197 intangibles except goodwill Asset FMV Claimed Basis
payment in later years. and going concern value.
If inventory items are included in an install- 6. Goodwill and going concern value Inventory . . . . . . $10,000 -0- $8,000
ment sale, you may have an agreement stating (whether or not they qualify as section 197 Land . . . . . . . . . 42,000 -0- 15,000
Building . . . . . . . 48,000 $9,000 36,000
which payments are for inventory and which are intangibles). Machine A . . . . . 71,000 27,200 63,800
for the other assets being sold. If you don’t, Machine B . . . . . 24,000 12,960 22,040
each payment must be allocated between the If an asset described in (1) through (6) is in- Truck . . . . . . . . . 6,500 18,624 5,376
Report the amount you receive (or will re- the lower number category. For example, if an Total
inventory and the other assets sold. cludible in more than one category, include it in . . . . . . . . . $201,500 $67,784 $150,216
ceive) on the sale of inventory items as ordinary asset is described in both (4) and (6), include it
business income. Use your basis in the inven- in (4).
Under the residual method, you allocate the
tory to figure the cost of goods sold. Deduct the Agreement. The buyer and seller may enter selling price to each of the assets based on
part of the selling expenses allocated to inven- into a written agreement as to the allocation of their FMV ($201,500). The remaining $18,500
tory as an ordinary business expense. any consideration or the FMV of any of the as- ($220,000 – $201,500) is allocated to your sec-
Residual method. Except for assets ex- sets. This agreement is binding on both parties tion 197 intangible goodwill.
changed under the like-kind exchange rules, unless the IRS determines the amounts aren’t
both the buyer and seller of a business must appropriate. The assets included in the sale, their selling
prices based on their FMVs, the selling ex-
use the residual method to allocate the sale Reporting requirement. Both the buyer and pense allocated to each asset, the adjusted ba-
price to each business asset sold. This method seller involved in the sale of business assets sis, and the gain for each asset are shown in
determines gain or loss from the transfer of must report to the IRS the allocation of the sales the following chart.
each asset and the buyer's basis in the assets. price among section 197 intangibles and the
The residual method must be used for any other business assets. Use Form 8594 to pro- Sale Sale Adj.
transfer of a group of assets that constitutes a vide this information. The buyer and seller Price Exp. Basis Gain
trade or business and for which the buyer's ba- should each attach Form 8594 to their federal Inventory . . . $10,000 $500 $8,000 $1,500
sis is determined only by the amount paid for income tax return for the year in which the sale Land . . . . . 42,000 2,100 15,000 24,900
the assets. This applies to both direct and indi- occurred. Building . . . 48,000 2,400 36,000 9,600
rect transfers, such as the sale of a business or Mch. A . . . . 71,000 3,550 63,800 3,650
the sale of a partnership interest in which the Mch. B . . . . 24,000 1,200 22,040 760
basis of the buyer's share of the partnership as- Sale of Partnership Interest Truck . . . . . 6,500 325 5,376 799
sets is adjusted for the amount paid under sec- Goodwill . . . 18,500 925 -0- 17,575
tion 743(b). A partner who sells a partnership interest at a Total . . . . . $220,000 $11,000 $150,216 $58,784
A group of assets constitutes a trade or gain may be able to report the sale on the in-
business if goodwill or going concern value stallment method. The sale of a partnership in-
could, under any circumstances, attach to the terest is treated as the sale of a single capital The building was acquired in 2014, the year
assets or if the use of the assets would consti- asset. The part of any gain or loss from unreal- the business began, and it’s section 1250 prop-
tute an active trade or business under section ized receivables or inventory items will be trea- erty. There’s no depreciation recapture income
355. ted as ordinary income. (The term “unrealized because the building was depreciated using the
The residual method provides for the con- receivables” includes income arising from com- straight line method.
sideration to be reduced first by cash and gen- pensation for services and depreciation recap-
eral deposit accounts (including checking and ture income, discussed earlier.) All gain on the truck, machine A, and ma-
chine B is depreciation recapture income since
savings accounts but excluding certificates of it’s the lesser of the depreciation claimed or the
deposit). The consideration remaining after this The gain allocated to the unrealized receiva-
reduction must be allocated among the various bles and the inventory can’t be reported under gain on the sale. Figure depreciation recapture
business assets in a certain order. the installment method. The gain allocated to in Part III of Form 4797.
For asset acquisitions occurring after March the other assets can be reported under the in- The total depreciation recapture income re-
15, 2001, make the allocation among the follow- stallment method. ported in Part II of Form 4797 is $5,209. This
ing assets in proportion to (but not more than) consists of $3,650 on machine A, $799 on the
their FMVs on the purchase date in the follow- For more information on the treatment of un- truck, and $760 on machine B (the gain on each
ing order. realized receivables and inventory, see Pub. item because it was less than the depreciation
541.
1. Certificates of deposit, U.S. Government claimed). These gains are reported in full in the
year of sale and aren’t included in the install-
securities, foreign currency, and actively Example—Sale of a Business ment sale computation.
traded personal property, including stock
and securities. On June 4, 2022, you sold the machine shop Of the $220,000 total selling price, the
2. Accounts receivable, other debt instru- you’d operated since 2014. You received a $10,000 for inventory assets can’t be reported
ments, and assets that you mark to market $100,000 down payment and the buyer's note using the installment method. The selling prices
Publication 537 (2022) Page 9
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