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Ask The Experts: Business Loss Deduction

Monday, November 05, 2012

Q: I purchased a business in 2000 and am currently in negotiations to sell it to a corporation. At the time, I took depreciation for goodwill, equipment, restrictive covenant, etc. I will be selling this business at a loss. Am I permitted to deduct the loss on my taxes?

A: I’m sorry to hear that you’ll recognize a loss on the sale of your business, but the good news is that the loss will be deductible.

It will be a little more complicated than just putting a single loss number on a specific line on your tax return. But if you indeed had a loss on the investment in the business, that loss will be deductible in some form.

The sale will most likely be treated as a sale of the specific assets of the business and therefore, the overall character of the loss will be based on those specific assets. Some assets may be capital in nature and therefore, any gain or loss will be a capital gain or loss. Other items will give rise to an ordinary gain or loss.

The first step is to actually identify the specific assets being sold. Then you’ll allocate the purchase price to each of these assets, generally based on fair market value. That will determine the gain or loss related to each asset or class of assets.

Any real property or depreciable property (including intangibles like franchise fees, copyrights, etc.) will be considered what is called Section 1231 property.

The treatment of any gains or losses on Section 1231 property is even a bit more complicated. All Section 1231 gains and losses are combined and then first are used to offset any other 1231 gains or losses from previous years. The resulting net loss would be treated as an ordinary loss, but if the net was a gain, it would be ordinary gain to the extent of any previous 1231 losses, but then any excess would be a capital gain.

I know this is a complicated topic. The best advice that I can give you is to sit down with a tax professional in your area to make sure that your specific facts and circumstances as adequately reviewed.

Again, the key point is that any loss you incur will be deductible, but the calculation and character of the loss will be complicated and will depend on the specific assets that are being sold. You can also check out IRS Publication 544, Sales and Other Dispositions of Assets for more detail.


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