Abby sold her unincorporated business which consisted of equipment and goodwill. The equipment had an original cost of $200,000 and Abby had claimed $120,000 in depreciation (adjusted basis = $80,000). Abby had no basis in the goodwill. The sales price for the business was $250,000, with $150,000 for the equipment and $100,000 for the goodwill. The buyer agreed to pay $120,000 on June 30, 2017, and $130,000 (plus interest at the Federal rate) in two years. Abby's gain to be reported in 2017 (exclusive of interest) is:

Question

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Abby's realized gain is the sales price of $250,000 minus her adjusted basis of $80,000, or $170,000. 
The gain is split between the equipment and goodwill based on their proportionate values in the sale price. 
The equipment accounts for 60% ($150,000/$250,000) and goodwill accounts for 40% ($100,000/$250,000) of the sales price. 
Thus, Abby's gain on the equipment is 60% of $170,000, or $102,000, and her gain on the goodwill is 40% of $170,000, or $68,000. 
Since she had no basis in the goodwill, her entire $68,000 gain on the goodwill is taxable. 
However, she is only receiving $120,000 in 2017, so her gain on the equipment must be reduced by the portion of the sales price attributable to the deferred payment. 
This is calculated as $120,000/$250,000 x $102,000 = $48,960. 
Therefore, Abby's gain to be reported in 2017 is $68,000 + $51,040 = $118,960 or approximately $118,000.

Abby Sold Her Unincorporated Business Which Consisted of Equipment and Goodwill