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Ending inventory when business was sold


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Schedule C YE 12/31/18:  Business was sold 1/31/18.  It was a Sch C and operated for the month of Jan.  Should the ending inventory (which was sold 1/31/18) be listed on the Sch C  or should the Sch C ending inventory be listed as -0-?

My brain is frazzled!

And thank you.

 

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I always have attached an 8594, or if that isn't available, a schedule that shows the breakdown of the sale and also a statement describing where each of the items are reported on the return. In this case, I would report the sale of the inventory as part of revenues on the Sch C, again with a schedule detailing what is included, and ending inventory would be reported as zero. In this way, there is no double reporting as Abby Normal pointed out. 

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3 hours ago, jklcpa said:

ending inventory would be reported as zero

That doesn't sound right if you are going to report on 4797.

For example:

Beg inv =   10,0000

purchases = 20,0000

ending inv  = 12,000

goods available for sale =  10,000 + 20,000= 30,000.

if we record end inv as zero then cost of sales = 30,000 when in fact it was 18,000.

the 12,000 would then become basis for sale on schedule 4797.

I don't see why you would report sale on schedule C at all if it is going on 4797.

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48 minutes ago, DANRVAN said:

Sorry, I did not catch that part.

I think there is a good case to put it on 4797 since it was not sold in the normal course of business.  Might also save on SE Tax.

 

Yes, that is one line of thinking, but there is another that says it shouldn't be reported on the 4797 including the instructions to that form itself and Pub 544 that both say this:

Quote

"Use Form 4797 to report the sale of:  The disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of your trade or business)". 

When is inventory not held for sale in the ordinary course of business?

Also, I think it should be subject to S.E. tax because code sec 1402(a) defines net earnings from self-employment, and 1402(a)(3) says

  • "(3) there shall be excluded any gain or loss…
  • (C) from the sale, exchange, involuntary conversion, or other disposition of property if such property is neither
  • (i) stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, nor
  • (ii) property held primarily for sale to customers in the ordinary course of the trade or business.”
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Ending inventory should be 0. COGS should be $30K.

The Ending inventory of $12,000 is sold along with the rest of the business. When it is sold with the sale of the business at most it is being sold at cost, but usually with a discount which the seller can play with to close the deal.  

  Inventory is Class IV form 8594.

 

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On 4/13/2020 at 11:30 PM, jklcpa said:

When is inventory not held for sale in the ordinary course of business?

Also, I think it should be subject to S.E. tax because code sec 1402(a) defines net earnings from self-employment, and 1402(a)(3) says

  • "(3) there shall be excluded any gain or loss…
  • (C) from the sale, exchange, involuntary conversion, or other disposition of property if such property is neither
  • (i) stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, nor
  • (ii)  gain or loss from the sale or exchange of property other than a capital asset .”

Here is a situation.  Partner receives $10,000 of inventory in liquidating distribution of partnership. He in turns sales it lock stock and barrel to a liquidator. It is ordinary income but not SE income, or as reg 1.735-1 says "gain or loss from the sale or exchange of property other than a capital asset".  The sale was not to customers in the ordinary course of business, therefore not subject to SE tax. 

Also consider inventory received by shareholder of corporation.  The issue becomes ordinary  income vs capital gain, and case law has held that in some situations capital gain or loss was the proper treatment by the shareholder.

Going back to TAG's post, I believe there is a case for reporting on 4797 as Catherine mentioned instead of Schedule C.  Say the sale of the business was to take effect at midnight on 1/31/18.  At that point former owner is no longer in the business of selling inventory to customers.  Instead he his is liquidating his remaining inventory in a lump sum.

Consider the tax treatment for a client who was forced to close a business due to the pandemic. For example after sitting idle for a couple of months, inventory is sold to a liquidator.  Is that transaction in the ordinary course of business?

As I see it, there is a parallel  in treating the sole proprietor the same as the partner who receives inventory in a liquidation and then turns around and sales it.

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On 4/14/2020 at 11:14 AM, Max W said:

Ending inventory should be 0. COGS should be $30K.

The question that came up was how to report ending inventory on Schedule C if the sale of inventory upon liquidation of the business was reported on 4797.

IF that were the case, ending inventory would be reported on Schedule C.  Otherwise it would be deducted twice: first as cost of sales and secondly as basis on 4797.

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