Q: I am a triathlete. My wife & I are partners in a sports promotion LLC here in California. It only grosses about $25,000 a year and has about $12,000 of assets that are fully depreciated. We sold the business in December 2012 for $20,000. The sales price is $10,000 for the equipment & $10,000 for the company's name & reputation, or goodwill.
How do I report the sale? Is it reported on the LLC tax return? Are there any special forms that need to be filed with the CA Secretary of State or is the final 2012 LLC tax return all that needs to be prepared? Any help would be greatly appreciated. thank you.
A: Based on your question, is appears that you are filing partnership tax returns for the LLC. The sale of the depreciable assets is reported on IRS Form 4797, assuming the partnership did not elect to expense their cost under Internal Revenue Code Section 179. Use Part III of Form 4797 to report the sale of each asset and the related "Section 1245" ordinary income recapture if the LLC held the asset for more than one year. Use Part II for assets held less than 1 year. If there is any difference between the federal and state gain amounts, use California Schedule D-1 to report the sales on the LLC's state return. The Schedule D-1 follows the same basic format as the IRS Form 4797, so use the corresponding parts of the form.
If you used the Section 179 expense election on any asset, that asset sale is reported directly on each partner/member's individual income tax return. Use the same form, IRS Form 4797 (and FTB Schedule D-1 if the state gain is different from the federal gain) to report the sale of Section 179 property.
Assuming you are not selling purchased goodwill, use IRS Schedule D (1065), and the related form 8949, to report the sale of the goodwill on your federal partnership return. FTB Schedule D (568) is used to report the sale for state purposes. The sale of purchased goodwill is reported on Form 4797 and Schedule D-1 in the same manner as depreciable assets.
The gains calculated on Form 4797 and Schedule D "flow" onto the Schedule K-1 for each partner/member. Each partner/member then enters the amounts from their Schedule K-1 on the appropriate schedule of their individual income tax return.
The partnership will also need to file IRS Form 8594, Asset Acquisition Statement, to report the allocation of the purchase price among the assets you are selling. This form is used with wither Form 1065 or Form 1040. This is a disclosure form that shows how the selling price of the business was allocated among the various classes being sold. The IRS uses this form, which is filed by both the seller and the purchaser, to see if they are reporting the sale consistently.
Filing the final tax return for the LLC will not wind it up for state purposes. It will continue to incur the annual $800 minimum tax until you file a Certificate of Dissolution (Form LLC-3) and a Certificate of Cancellation (Form LLC-4/7) with the California Secretary of State. You can dispense with the filing of the Form LLC-3 if all of the members of the LLC are voting to dissolve and a statement to that effect is made on Form LLC-4/7. These forms are available from the Secretary of State's web site, www.sos.ca.gov/business/llc/forms/. There are no fees for filing these forms by mail. There is a $15 special handling fee if you drop the forms off in person. They should be filed within 12 months of the filing of the final tax return for the LLC. I recommend filing these forms as soon as possible after filing the final tax return for the LLC.