Typically, you will transfer your interest in the business to others in return for cash or property. This will generally result in capital gain (or loss) or ordinary gain (or loss).
How Is the Sale of an Interest in a Sole Proprietorship Taxed?
The sale of a sole proprietorship is treated as a sale of the assets of the sole proprietorship. The gain or loss on each asset of the sole proprietorship is calculated separately. Assets may be capital assets, depreciable property used in the business, real property used in the business, or inventory.
Thus, in a sale of a sole proprietorship:
- The sale of capital assets results in capital gain or loss.
- The sale of inventory results in ordinary income or loss.
- The sale of depreciable property or real property used in the business and held for more than one year results in gain or loss from Section 1231 property. If Section 1231 gains exceed Section 1231 losses, net Section 1231 gains are treated as capital gains. If Section 1231 losses exceed Section 1231 gains, net Section 1231 losses are treated as ordinary income.
The buyer and seller have a certain amount of flexibility to allocate consideration and fair market value to assets in a written agreement. In the absence of such an agreement, consideration is allocated to assets under a complex multiple-class system.
If you have questions or need assistance, contact the Tax Experts at Henssler Financial:experts@henssler.com or 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
