How to handle ending inventory on Form 1125-A after selling entire business inventory

I'm in a bit of a situation with my business taxes and Form 1125-A. My ending inventory was 158,503 as of 10/31. A few days later, I sold my entire business including all the inventory for 162,650 (which gave me a gain of $4,147). I'm trying to figure out the proper way to record this on my taxes. Right now I have the following journal entry: DB - Cash - 162,650 CR - Inventory - 158,503 CR - Gain on Sale of Inventory - 4,147 This clears my inventory on my balance sheet, but I'm completely lost on how to show this properly on Form 1125-A. Should I instead increase my COGS by 158,503 to show zero inventory? If I do that, it would lower my net income, but then I'd show "Other Income - Bulk Sale Inventory" for 162,650. Both approaches seem to result in the same net income, but I'm not sure which is the correct way to handle this for tax purposes. Does anyone know the proper way to report this on Form 1125-A when you've sold your entire inventory as part of a business sale?

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20 comments

Diego Mendoza

•8M

Your journal entry is correct from an accounting perspective, but for Form 1125-A you need to think about what these numbers represent in terms of inventory flow for tax purposes. On Form 1125-A, you should report your ending inventory as zero since you no longer had it at year-end. Your inventory at the beginning of the year and purchases during the year remain unchanged. The inventory you had on 10/31 (158,503) will ultimately flow through to your COGS calculation. The gain portion (4,147) should be reported elsewhere on your tax return as "Other Income" or "Gain on Sale of Business Assets" depending on your business structure and tax form. This is technically not part of your regular inventory/COGS flow but a separate transaction - the premium paid above inventory value. This approach accurately reflects what happened: you sold all your inventory, leaving you with zero at year-end, and received a premium above cost that represents additional income.

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Diego Mendoza

•8M

Since the entire business was sold, there is no "next year" for this tax entity - you'll show zero ending inventory because that's the factual situation. The business has ended operations, so there's no beginning inventory concern for the following year. The treatment would differ somewhat in an asset sale versus a stock sale. In an asset sale (which this appears to be), you're selling specific business assets including inventory. In a stock sale, the corporation itself continues to exist with the same tax basis in assets, just under new ownership. The stock sale wouldn't directly impact Form 1125-A as the corporation would continue reporting normally.

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Sean Flanagan

•8M

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Aisha Hussain

•8M

Tax accountant here - I see this question a lot with business sales. The correct treatment depends partly on your business entity type, which you didn't mention. Assuming you're a sole proprietor or single-member LLC filing Schedule C: 1. On Form 1125-A: Show your actual beginning inventory, purchases, and other costs. For ending inventory, put zero (since you sold it all). 2. For the gain: Report this on Form 4797 (Sales of Business Property) Part II as "gain from sale of business assets" rather than just treating it as ordinary income. This approach properly separates your normal business operations from the one-time sale of business assets.

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Aisha Hussain

•8M

You'll still file for the full calendar year. On Schedule C, you'll report your business income and expenses from January 1 through November 2 (your last day of business). There's no need to file a short-year return for a Schedule C business - you simply stop reporting business activity after the sale date. For November and December, you won't have any business income or expenses to report since the business was sold. Just make sure to check the box on Schedule C that indicates this is your final return for this business.

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Isabella Costa

•4M

I went through this exact scenario last year when I sold my consulting business. The key thing to remember is that Form 1125-A is specifically for tracking your normal business inventory flow throughout the year, not for one-time asset sales. Here's what worked for me: I reported zero ending inventory on Form 1125-A (because factually, I had no inventory left at year-end). The $158,503 inventory cost flowed through to COGS naturally. Then I reported the entire $162,650 sale proceeds on Form 4797 Part II, with the $158,503 as my basis in the inventory, resulting in the $4,147 gain being properly classified as business asset sale income. This approach keeps your regular business operations (reflected in COGS) separate from the asset sale transaction, which is exactly what the IRS expects to see. Make sure you have good documentation of the sale agreement and date - the IRS may want to verify the business closure if they see your inventory drop to zero.

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