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Components of the sale of a business

Margie purchased a commercial building in January 1990 for $100,000. She also purchased equipment for $30,000 at that time and opened a business. She replaced the roof of the building in August 1995 at total cost of $20,000. She has depreciated the building and new roof using the straight-line method. The equipment has been fully depreciated. On January 1, 2006 she sold the business for $750,000. The contract allocated the sales price as follows:

Building $400,000
Equipment $50,000
Goodwill $175,000
Non compete covenant $125,000

The covenant is paid monthly and is for five years. How much gain or loss must Margie report? Classify the gain or loss and explain. Give Margie some suggestions for reducing her tax liability.

Solution Preview

1. Building depreciation has been computed using 31.5 years, the calculation allowable at the time of purchase of the building. I used the charts which might vary slightly from making a manual calculation. The roof uses the same method as the original asset even though the rules had changed to 39 years by 1995. Using the ...

Solution Summary

The solution computes the book basis of assets owned and then calculates gain for the assets sold. The character of the gain is discussed regarding each asset, followed by some planning ideas should have considered before the sale was closed.