Contributed by: MatthewD, FreeTaxUSA Agent, Tax Pro
Selling a business is a rare occurrence, and most small business owners won’t have to deal with the situation; however, it does happen. In this article we’ll discuss the steps to take and how to report the sale of a business on your tax return in FreeTaxUSA.
When you sell a business, generally it’s reported on your tax return as a sale of individual assets, not as one single sale. This matters because each asset may be taxed differently. For example, one asset may create a capital gain, while another may create ordinary income or an ordinary loss.
Steps to reporting the sale of a business
Step 1: Determine the assets sold
Make a list of the assets which are part of the sale. Assets may include:
- Equipment and machinery
- Furniture and fixtures
- Vehicles
- Inventory
- Buildings and land
- Customer lists, patents, and other intangibles (non-physical assets)
- Goodwill
Step 2: Determine the sales price and value of each asset. You may need to do some research and find the fair market value (FMV) of your assets. The buyer and seller must complete IRS Form 8594: Asset Acquisition Statement Under Section 1060 when the reporting requirements apply. The allocation numbers reported on Form 8594 by the buyer and seller must match for consistency. **
Step 3: Report the sale of each asset on your tax return.
Assets will have a gain or loss. Depending on the sales price and adjusted basis, each asset will report an ordinary gain or loss or possibly a capital gain. The adjusted basis of each asset will depend on the depreciation or improvements. The purchase price plus improvements minus depreciation will equal the adjusted basis. The purchase price above the overall price of the assets and intangible assets is goodwill, which is reported as a capital gain.
Example: Sale of used clothing business
This example shows how one business sale can include both a depreciated asset and goodwill. Each part of the sale is entered separately because each part may flow to a different tax form.
Anne has an online clothing store that she’s decided to sell. She found a buyer and negotiated a price. Let’s take a look at the sale of an asset and the goodwill.
After reviewing her list of assets and inventory in the sale, she calculates she’ll have goodwill over the value of the assets sold. The goodwill is reported as a capital gain and is entered as an investment sale.
To calculate goodwill, Anne will calculate the total sale price minus her net assets. Net assets are all tangible and intangible assets minus all liabilities. In our simple example, Anne’s total sales price is $25,000. Her net assets are calculated at $16,500 and liabilities are $0. After subtracting net assets from the sale price, her goodwill is $8,500 ($25,000 – $16,500).
When you sell a depreciated asset, you may need to report some or all of the depreciation you previously claimed as ordinary income. This is called depreciation recapture and generally creates a gain on the sale of the asset.
Let’s take one of Anne’s depreciated assets, a group of clothing racks. She purchased the racks for $2,000 (purchase price) and sold them for $1,800 (sales price). The accumulated depreciation is $1,643. To figure her gain, she’ll need her adjusted basis, which basis is calculated by subtracting the depreciation from the cost: $2,000 - $1,643 = $357. Her ordinary gain is the sales price minus the adjusted basis: $1,800 – 357 = $1,443.
Anne will enter the sale of the clothing racks in her FreeTaxUSA account. She’ll follow these steps:
- Follow the menu path: Income > Business/Rental Income > Business Income (Schedule C)
- Select Edit next to the business.
- Click Edit/Add next to Depreciable Assets.
- Either add the information for an asset or select Edit next to the asset.
- Enter the information about the asset. Be sure to enter the Date Sold, Disposed of, or Retired and the Original Cost or Basis.
- In our example, the clothing racks were sold on 7/1/2025, used 100% for business, and the cost was $2,000.
- As you continue, make sure you select the correct asset category. In our example, the racks are considered equipment.
- Select I sold or disposed of it (normal sale or disposal).
- If you took a Section 179 expense deduction for the asset in a prior year, enter that amount here.
- Enter the Sales Price and Expenses.
When you review your return, the sale of property used in a business is reported on Form 4797 and Schedule 1, line 4.
Now Anne will report the goodwill sale. Here’s how she’ll enter this in her FreeTaxUSA account:
- Follow the menu path: Income > Common Income > Investments and Savings (1099-INT/DIV/B/DA).
- Click +Add Investment
- Select Save and Continue.
- Select Other Sales.
- Add a person or broker as a description.
- Click Other for the type of investment.
- Continue until you get to the Tell us about your investment sale screen.
- Enter the Investment Description, Date Acquired - the date your business opened, Date Sold, and the calculated goodwill as Sales Proceeds. The Cost or Other Basis is generally $0 when you start your own business.
The gain is reported on form 8949 and Schedule D. In this example, the gain is long-term because Anne held the business for more than one year before selling it. If your business was started and then sold in less than one year, it would be a short-term gain.
Conclusion
Although the sale of a business may be complex, the process is easier to follow when you break it up. There are 4 basic steps:
- Identify the assets sold: Make a complete list of business assets included in the sale. Similar assets may be grouped together, like a dozen chairs.
- Determine the value of each asset: Allocate the total sales price among the individual assets based on their fair market values. Complete Form 8594 if required.
- Report each asset properly on the tax return: Depreciable business property is reported through the business depreciation section and usually flows to Form 4797 and Schedule 1. Any depreciation previously claimed may need to be recaptured as ordinary income. Refer to your prior year tax return(s) for depreciation.
- Report the goodwill as a capital gain: Goodwill equals the total sale price minus your net assets.
FreeTaxUSA has the tools you need to correctly prepare a tax return with the sale of a small business. If you have a complex situation, you may want to consult with a tax professional or add FreeTaxUSA Pro Support to assist you with the process.
** Form 8594: Asset Acquisition Statement Under Section 1060 is not supported by FreeTaxUSA. Both the seller and purchaser of a group of assets that makes up a trade or business must use Form 8594 to report such a sale if:
- goodwill or going concern value attaches, or could attach, to such assets and
- the purchaser's basis in the assets is determined only by the amount paid for the assets.
You may still prepare your return with FreeTaxUSA. However, you’ll need to complete Form 8594 manually, attach it to a printed copy of your return, and mail the return to the IRS.