Liquidating Assets Before or After Dissolving My Sole Proprietorship DJ Business?

This is helpful but I'm still confused... if I sell the equipment after dissolving the business, would that still be taxable income? Or would it just be considered a personal sale at that point with no tax implications?

If you dissolve the business first, you'd still need to deal with the conversion of business assets to personal use at that time, which would trigger the tax. The IRS considers this a "deemed sale" at fair market value. If you later sell those items as personal property, that would be a separate transaction. Since they'd already be personal items with a new basis equal to their fair market value at the time of conversion, you'd only pay tax on any amount you receive above that value (which is unlikely if they're already used equipment).

How does this actually work? Do you need to provide all your business records or just specific information about the assets? I'm not very organized with my paperwork and wondering if this would work for me.

Sounds interesting but I'm skeptical. How does it know the fair market value of DJ equipment? Those values can vary widely depending on the brand, condition, etc. Did it actually give you accurate valuations?

You only need to provide the information relevant to your specific situation. In my case, I uploaded my asset depreciation schedule and some basic info about my revenue/expenses. The system is quite flexible with the format - I had a mix of spreadsheets and PDF statements and it processed everything fine. As for market valuations, it doesn't determine the exact value of your specific equipment - that part is still on you. What it does is analyze the tax implications once you input the estimated values. In my case, I checked eBay for comparable sold items to estimate fair market values, entered those figures, and the system calculated the tax outcomes for different selling/conversion scenarios.

Wait so this service just calls the IRS for you? Couldn't you just keep calling yourself until you get through? Why would anyone pay for that?

I don't believe for a second that this actually works. The IRS phone system is completely broken. No way some service can magically get you through when millions of people can't even get past the automated system.

It doesn't just call for you - it navigates the entire IRS phone tree and waits on hold in your place. When an actual human IRS agent picks up, they call your phone and connect you directly to that agent who's already on the line. No more sitting on hold for hours or getting disconnected after waiting. The service uses technology to stay connected and navigate the system until a person answers. I know it sounds too good to be true, but after trying for weeks to get through on my own and failing every time, this was literally the only way I managed to speak with an actual IRS agent about my situation.

What exactly qualifies as Section 1231 property? And does this still apply if the assets are fully depreciated?

Section 1231 property includes depreciable property used in a trade or business that's held for more than one year. So your DJ equipment would typically qualify if you've owned it for more than a year, which it sounds like you have. Even fully depreciated assets can still benefit from Section 1231 treatment. The fact that they're fully depreciated just means your basis is zero (or close to it), but the character of the gain can still benefit from potentially favorable capital gain treatment. However, be aware that depreciation recapture rules may cause some or all of the gain to be treated as ordinary income anyway, particularly with personal property like equipment.

What tax software were you using? I'm using TurboTax and wondering if it handles this situation correctly or if I need something more specialized.

I was using H&R Block online, which I normally find pretty good for my basic tax needs. The problem wasn't really the software itself - it was that I didn't understand all the forms and steps needed for proper business dissolution. I missed filing Form 4797 for reporting the sale of business assets, and didn't properly document the conversion of business assets to personal use. No tax software can really help you make the strategic decisions about WHEN to sell assets versus when to convert them - it just processes the information you give it. That's why I suggest getting professional help for at least one session to map out your strategy before you start entering things into tax software.