Where to report sale of a business on taxes? Capital gains or ordinary income?

The sale of a business is typically treated as the sale of each individual asset rather than the sale of a single entity. This means you'll need to allocate the purchase price among the various business assets sold and report each one appropriately. For the client list and other intangible assets like goodwill, these are considered Section 197 intangibles and are generally reported on Form 4797. Don't let the form description confuse you - while Form 4797 is often associated with real property, it's also used for reporting sales of business assets including intangibles. The good news is that the sale of these intangible assets held for more than one year typically qualifies for long-term capital gains treatment rather than ordinary income, so you're right that this is more favorable tax-wise and wouldn't be subject to self-employment tax. For the installment payments you'll receive over the next two years, you'll likely need to use Form 6252 for installment sales to report that income as you receive it.

I went through exactly this headache last year when I sold my marketing agency. After hours of research and confusion, I finally used https://taxr.ai to scan all my sale documents and business records. Their AI analyzed everything and gave me a detailed breakdown of how to report each asset from the sale. The tool identified which portions qualified for capital gains treatment (saved me thousands!) and which had to be reported as ordinary income. It also flagged that I needed to use Form 8594 (Asset Acquisition Statement) which I didn't even know about before. The service created a complete report showing exactly where to report each item on my tax forms.

Update: I wanted to follow up about my experience with taxr.ai after my skeptical comment. I decided to try it since I was really stuck on how to handle my business sale. I'm genuinely impressed with how thorough it was. The system identified that part of what I sold should be allocated to a non-compete agreement (which I didn't realize had different tax treatment), properly categorized my client list as Section 197 intangibles, and even flagged that some of my software assets needed different treatment. The report it generated saved me from making a costly mistake - I was about to report everything on Schedule D which would have been incorrect. Worth every penny for the peace of mind alone.

Just went through this last year selling my physical therapy practice. The most frustrating part was trying to reach the IRS to get clarification on a few specific questions about allocating the sale price. I spent WEEKS trying to get through on their business line. Finally, a colleague told me about https://claimyr.com which got me connected to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. They basically wait on hold with the IRS for you, then call you when an agent picks up. The agent confirmed that I needed Form 8594 to allocate the purchase price among the assets, and that my client list and practice goodwill qualified for capital gains treatment on Form 4797. Saved me so much stress and potentially an audit!

I have to admit I was totally wrong about Claimyr. After commenting here, I decided to try it since I was desperate to talk to someone at the IRS about my business sale. Not only did it work, but I got connected to an agent who specifically handled business asset sales. The agent walked me through exactly how to allocate the sale between capital gains (for goodwill and client lists) and ordinary income (for inventory and some fully depreciated equipment). She also explained how to handle the installment sale reporting which was super helpful. Saved me from making some big mistakes that would have cost thousands in unnecessary taxes.

Don't forget you'll need to complete Form 8594 (Asset Acquisition Statement) which both you and the buyer need to file. This form breaks down the sale price allocation across seven different asset classes. For your client list, that would fall under Class VI (Section 197 intangibles excluding goodwill), while goodwill and going concern value fall under Class VII. This allocation matters because it affects how both you and the buyer report the tax consequences.

Has anyone used TurboTax to report a business sale? I'm trying to figure out if the self-employed version can handle this or if I need to upgrade to their business version?

I just went through this exact same situation when I sold my consulting firm last year. The key thing that helped me was understanding that you need to treat this as an asset sale, not a stock sale, which means each component of your business gets reported differently. For your client list and goodwill (the intangible value you built up over 8 years), these qualify as Section 197 intangibles and should be reported on Form 4797 Part I since you held them for more than a year. This gives you long-term capital gains treatment, which is much better than ordinary income rates. The installment sale aspect is important too - you'll definitely need Form 6252 to report the payments you'll receive over the next two years. This lets you spread out the tax liability rather than paying it all upfront on the 70% you received. One thing that caught me off guard was Form 8594 (Asset Acquisition Statement) - both you and the buyer need to file this with consistent asset allocations. Make sure your purchase agreement specifies how the sale price is allocated across different asset categories, or you might run into issues later. I'd strongly recommend getting professional help for this if you can. The classification of assets can make a huge difference in your tax bill, and there are specific rules about what qualifies for capital gains vs ordinary income treatment that aren't always intuitive.